What a brutal six months it’s been for Domo. The stock has dropped 66.1% and now trades at $2.90, rattling many shareholders. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
Is there a buying opportunity in Domo, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Domo Will Underperform?
Even though the stock has become cheaper, we’re swiping left on Domo for now. Here are three reasons why there are better opportunities than DOMO, plus one stock we’d rather own.
1. Weak Billings Point to Soft Demand
Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.
Domo’s billings came in at $60.43 million in Q1, and over the last four quarters, its year-on-year growth averaged 1.3%. This performance was underwhelming and suggests that increasing competition is causing challenges in acquiring/retaining customers. 
2. Revenue Projections Show Stormy Skies Ahead
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Domo’s revenue to drop by 1.7%, a decrease from its 7.5% annualized growth for the past five years. This projection doesn’t excite us and suggests its products and services will see some demand headwinds.
3. Long Payback Periods Delay Returns
The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.
Domo’s recent customer acquisition efforts haven’t yielded returns as its CAC payback period was negative this quarter, meaning its incremental sales and marketing investments outpaced its revenue. The company’s inefficiency indicates it operates in a highly competitive environment where there is little differentiation between Domo’s products and its peers.
Final Judgment
We cheer for all companies solving complex business issues, but in the case of Domo, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 0.4× forward price-to-sales (or $2.90 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better investments elsewhere. We’d recommend looking at a top digital advertising platform riding the creator economy.
Stocks We Would Buy Instead of Domo
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