Domo's (DOMO +0.37%) stock sank 36% to a three-and-a-half-year low on Aug. 25 after the cloud-based enterprise software company posted its latest earnings report. For the second quarter of fiscal 2024 (ended July 31), its revenue rose 5% year over year to $79.7 million and beat analysts' estimates by $0.8 million. It narrowed its adjusted net loss from $8.2 million to $0.8 million, or $0.02 per share, which also cleared the consensus forecast by seven cents.
Those headline numbers weren't disastrous, but its grim guidance suggested the grueling slowdown was far from over. Does Domo's post-earnings plunge represent a buying opportunity? Or is it a falling knife which should be avoided?
Image source: Getty Images.
From double-digit growth to low single-digit growth
Domo's cloud-based platform enables a company's leaders to analyze and manage their business on a single app. It bundles together data-visualization tools, analytics services, and collaboration tools on unified dashboards. Users can also install additional apps on its platform via an integrated app store.
Domo went public five years ago, and it initially impressed investors with robust billings and revenue growth. Between fiscal 2019 and fiscal 2023, billings grew at a compound annual growth rate (CAGR) of 18% and its revenue at a CAGR of 21%. But in fiscal 2023 (which ended this January), Domo suffered a severe slowdown.
|
Metric |
FY 2019 |
FY 2020 |
FY 2021 |
FY 2022 |
FY 2023 |
|---|---|---|---|---|---|
|
Billings Growth |
28% |
14% |
23% |
27% |
9% |
|
Revenue Growth |
31% |
22% |
21% |
23% |
20% |
Data source: Domo.
At the end of fiscal 2023, Domo predicted revenue would grow 5% to 7% in fiscal 2024. It reiterated that forecast during its Q1 report in May. But during its Q2 report, it reduced that outlook to just 2% to 4% growth.
Its remaining performance obligations (RPO), or the value of all the contracts it expects to recognize as revenue over the next 12 months, also grew a mere 3% year over year in Q2 compared to its 6% growth in Q1.
Why has Domo's growth stalled?
That slowdown was caused by three challenges. First, the macro headwinds drove many companies to rein in their spending on big software upgrades. Second, Domo faces stiff competition including from Salesforce's Tableau and Microsoft's Power BI, and other similar analytics and data-visualization platforms. Those tech giants can simply bundle their competing services with their other cloud-based services to drive smaller players like Domo out of the market.
Lastly, Domo is trying to attract more customers with consumption-based prices instead of the stickier subscriptions which still brought in 89% of its Q2 revenue. Domo insists that shift can help it gain more budget-conscious customers in this tougher macroenvironment. While giving it opportunities to up-sell additional services, it could also reduce revenue per customer, limit its pricing power, and narrow its moat instead.
NASDAQ: DOMO
Key Data Points
It still can't generate stable profits
Domo is still unable to generate profits by either generally accepted accounting principles (GAAP) or non-GAAP metrics. On a GAAP basis, Domo's net loss widened from $102.1 million in fiscal 2022 to $105.6 million in fiscal 2023. On a non-GAAP basis, it narrowed its net loss from $41.5 million to $21.6 million, or $0.63 per share.
Domo expects to narrow its non-GAAP net loss again to $0.39 to $0.47 per share in fiscal 2024. It also expects its non-GAAP operating margin, which improved from negative 11% in fiscal 2022 to negative 2% in fiscal 2023, to finally turn positive for the full year in fiscal 2024. The company also expects its adjusted free cash flow (FCF) to nearly break even by the second half.
Those are certainly baby steps in the right direction, but they probably won't convince investors that Domo is a deep value play. Its balance sheet isn't in great shape either. Domo ended Q2 with just $63.9 million in cash, cash equivalents, and restricted cash -- which was down 20% from a year ago -- and $108.6 million in long-term debt.
What do the valuations show?
With an enterprise value of $450 million, Domo might seem dirt cheap at just 1.4 times this year's sales. After all, Salesforce and Microsoft trade at 6 and 10 times this year's sales, respectively. Yet Salesforce and Microsoft are both growing faster and generating higher profits than Domo since they're much bigger blue-chip tech giants.
That comparison highlights Domo's biggest problem: It's an unprofitable underdog in a crowded market which is growing at a slower rate than the profitable market leaders.
Some investors were willing to stick around when Domo was still generating double-digit billings and revenue growth, but they probably won't stay onboard for its low single-digit, near-term growth. Simply put, investors should steer clear of Domo and stick with other top cloud stocks instead.
