Domo’s stock price has taken a beating over the past six months, shedding 79.8% of its value and falling to $2.69 per share. This 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? Get the full breakdown from our expert analysts, it’s free.

Why Do We Think Domo Will Underperform?

Even though the stock has become cheaper, we don't have much confidence in Domo. Here are three reasons we avoid DOMO and a 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 $111.2 million in Q4, and over the last four quarters, its year-on-year growth averaged 2%. This performance was underwhelming and suggests that increasing competition is causing challenges in acquiring/retaining customers.

2. Projected Revenue Growth Shows Limited Upside

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 stall, close to its 8.7% annualized growth for the past five years. This projection is underwhelming and suggests its newer products and services will not catalyze better top-line performance yet.

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 see the value of companies addressing major business pain points, but in the case of Domo, we’re out. Following the recent decline, the stock trades at 0.3× forward price-to-sales (or $2.69 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now. We’d suggest looking at a dominant Aerospace business that has perfected its M&A strategy.

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