Is Domo's Growth Already Grinding to a Halt?

Domo (NASDAQ: DOMO) is a divisive stock for investors. The bulls were impressed by the cloud analytics software provider's mobile-first approach, its double-digit revenue growth, and its improving margins. The bears claimed that it faced plenty of bigger competitors and that it was burning through too much cash.

The bulls initially seemed right, as Domo roughly doubled from its IPO price to the low $40s between Sept. 2018 and March 2019. However, Domo's subsequent drop -- which breached its IPO price -- favored the bears. Domo's recent second-quarter report attracted even more bears.

A young woman checks a tablet.

Image source: Getty Images.

The key facts

Domo's platform lets executives manage their entire companies via a suite of mobile analytics and data management tools. Employees can also access that data to make business decisions.

Its expanding ecosystem includes an app-store, an AI platform that crunches data and answers questions, collaboration services for employees, a data warehouse, and media tools for marketing campaigns. It serves over 1,500 organizations worldwide. Here's how Domo's business fared over the past year.

YOY growth Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020
Billings 35% 29% 26% 28% 9%
Revenue 32% 30% 31% 22% 22%

YOY = Year-over-year. Source: Domo quarterly reports.

Domo's 22% revenue growth in the second quarter met analysts' expectations, but its 9% billings growth missed expectations for high double-digit growth. Domo blamed that slowdown on its pursuit of larger enterprise customers, which throttled its billings growth from smaller customers.

For the second quarter, Domo expects its revenue to rise just 11%-15% annually and for its billings to decline 6%. For the full year, it expects its revenue to rise 18%-19%, compared to its 31% growth last year. Those forecasts clearly indicate that Domo's growth is peaking -- possibly due to competition from rivals like Salesforce (NYSE: CRM) and Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) Google.

Salesforce recently acquired Domo's rival Tableau and integrated its analytics tools into its market-leading CRM (customer relationship management) platform. Google also acquired Looker, another similar analytics platform, and integrated its services into Google Cloud. Those bundles could be much more appealing to the big enterprise customers which Domo is pursuing.

A laptop running various cloud services.

Image source: Getty Images.

A sticky but unprofitable ecosystem

On the bright side, Domo is retaining nearly 90% of its customers, and most of its revenue still comes from its higher-margin subscriptions. This indicates that its ecosystem is sticky and it has plenty of opportunities to cross-sell new services.

YOY growth Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Metric Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020
Billings 35% 29% 26% 28% 9% Subscriptions as a percentage of sales 82% 83% 81% 84% 84%
Revenue 32% 30% 31% 22% 22% Subscription gross margin 71% 73% 74% 77% 75%

Source: Domo quarterly reports.

Domo's operating margins are improving slightly as it curbs its spending, but it still posted a loss of $31.2 million, compared to a loss of $46.4 million a year earlier. On a non-GAAP basis, which excludes its stock-based compensation and other one-time charges, its net loss narrowed from $36.2 million to $26.4 million. Domo expects to remain unprofitable in the third quarter and for the full year.

Meanwhile, its cash and equivalents plunged from $177 million at the end of January to $97.9 million at the end of July. That cash burn rate is alarming, and indicates that the company might need to raise cash within a year via a secondary offering.

It's cheap for a reason

Domo's stock admittedly looks cheap at less than four times next year's sales. Salesforce, by comparison, trades at over six times next year's sales.

But Domo is cheap for obvious reasons. Its growth is fading quickly, it faces beefed up competitors like Salesforce and Google, it's burning through too much cash, and it lacks a clear path toward profitability. Domo is also cutting costs as the competition heats up -- which could boost its margins but dull its competitive edge.

I'm not saying that Domo is doomed yet, but the stock could be headed off a cliff if it doesn't get its revenue and billings growth back on track.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and The Motley Fool has the following options: long January 2021 $100 calls on The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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