After 5x Recovery, Domo Has No More Room To Grow

After rallying nearly 5x since the lows seen on March 23, we believe Domo Inc’s stock (NASDAQ: DOMO) does not have room to grow. Rising from $8 to $37 off the recent bottom, the price gained more than the broader S&P 500 index, which moved 48%. Domo’s Business Cloud platform enables processes that are dependent on business intelligence data and can be used across business segments. The Covid-19 outbreak has hastened digital transformation initiatives for many organizations which has helped Domo’s stock price, revenue, and operating margin. The company beat consensus for revenue by $3 million and $2 million for Q1 2021 (ended April 2020) and Q2 2021 (ended July 2020), respectively. Further, it beat consensus for earnings by $0.23 and $0.13 for Q1 2021 and Q2 2021, respectively.

While the company has seen steady revenue growth over recent years, its P/S multiple has also increased. We believe the stock has ran out of room to run, after the recent rally, as the positives seem priced in. Our dashboard What Factors Drove 36% Change in Domo Inc Stock between FY 2019 and now? has the underlying numbers.

Looking at the bigger picture, some of this rise over the last two years is justified by the roughly 22% growth seen in Domo’s revenues from FY 2019 to FY 2020 (ended January 2020). Further, its losses have also decreased from $154 Mil in FY 2019 to $125 Mil in FY 2020. The fall in net losses is mainly due to better Gross Profit Margin and reduced costs in Sales and Marketing and Research and Development costs.

Domo’s P/S multiple has increased from 3.1x in FY 2019 and 3.8x in FY 2020. This key metric is up to 5.8x now, due to the benefit from faster digital transformation. There is a downside risk when the current P/S is compared to levels seen in the past years. P/S of 3.8x at the end of FY 2020 and 3.1x as recent as late FY 2019.

Effect of Coronavirus

Domo Inc is a cloud software company specializing in business intelligence tools and data visualization. The ongoing coronavirus pandemic has not affected its revenues as businesses are hastening digital transformation initiatives. The company has posted revenue of $99.7 million for the first two quarters of FY 2021, up by 21% y-o-y. GAAP Operating margin improved by 37 percentage points compared to the same period in the previous year.

In any case, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. 

So, while Domo seems to have ran out of room to grow in the near term, what if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

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