Domo, Inc. (NASDAQ:DOMO) is a software company which offers a leading big data analytics and visualization platform. The company was founded in 2010 and had their IPO in 2018. Since then the stock had a volatile couple of years before soaring by 158% in 2020, during the growth stock bull market. However, since November 2021 the stock has had a major correction down by 64% and now trades at just 20% higher than its IPO price at the end of the first day of trading, $27 per share. However, the company has increased their revenue by 22% in 2021 alone and is trading at the low end of its historic price to sales ratio. The Big Data Market is forecasted to increase by 47% between 2022 and 2027, reaching $103 billion by the end of the period. Domo is poised to benefit from this trend, as a company which helps enterprises manage and understand their vast data sets. Let’s dive into the business model, financials and valuation for the juicy details.
Domo Inc provides a leading software platform which enables multiple data sources to be analysed in one place and visualized via a single dashboard. This is a game-changer for businesses which have multiple data sets in various “siloed” locations. This could include Business Intelligence (BI) data, Marketing analytics data, advertising data, supply chain data, market share data and more. A single unified view enables better and more consistent decision making across the enterprise with a data backed approach. Businesses can build and integrate their own data apps and workflows easily, in addition to accessing “self serve” analytics.
Domo has over 2,200 customers which include major brands such as: Ebay, Loreal, Cisco, Zillow, DHL, Unilever, NBA and more. Loreal call’s Domo their “cockpit” and they use the platform for managing all their global data sources and help to discover ROI (Return on Investment) for their marketing efforts.
Their business model primarily focuses on subscription services and they are on a “path to $1 billion in billing”. They aim to accomplish this through various initiatives such as adding 25% more sales reps per year. In addition, to increase their customer retention rate from 88% in 2021 to 92%. They also aim to move from “Challenger to Leader” on the Gartner Magic Quadrant, a popular benchmark for B2B technology companies. Recently they announced new integrations with Microsoft 365 and Teams, which should increase the value proposition offered to users.
Domo released their earnings for the first quarter of 2022. Total revenue came in at $74.5 million, which was an increase of 24% year over year. Subscription revenue made up 87% of this and $64.6 million for the first quarter. Billings came in at $72.9 million, which represented a 25% increase year over year.
As a Software company, Domo has a very high GAAP Gross margin of 83% consistent with the prior quarter. While they are operating at a loss of -$88 million in the trailing 12 months, but this is generally due to their aggressive investments into both R&D ($81 million) and Sales and Marketing ($198 million).
Domo has a strong balance sheet with Cash and cash equivalents of $84.0 million as of April 30, 2022. With virtually no interest bearing debt. For FY2022, they are guiding for between $315.0 million to $319.0 million, up ~24% YoY at the low end of the range.
In order to value Domo, I have plugged the latest financial data into my advanced valuation model which uses the discounted cash flow method of valuation. I have forecasted 30% revenue growth for the next 2 to 5 years based upon analyst estimates and the growth Big data market mentioned prior.
In addition I have forecasted margins to increase to 25% which is slightly above the 23% average for the software industry. To increase the accuracy of the valuation, I have capitalised the company’s investments into R&D.
Given these factors I get a fair value of $10/share, the stock price is currently $32 per share and thus the stock is overvalued intrinsically. However, if we compare the stock’s Price to sales ratio to historic levels it is actually trading at the low end of its range, with a Price to Sales (forward) ratio = 3.5.
Domo’s competitor platforms include other business analysis tools such as, Microsoft Power BI, Tableau Desktop, Qlik Sense, SAP BusinessObjects BI Suite, Sisense Fusion Analytics, MicroStrategy, TIBCO Spotfire, Looker.
The Majority of these are owned by larger corporations for example, Microsoft BI, SAP and Tableau has now been acquired by Salesforce. Thus a more useful comparison for valuation may be more SaaS based growth stocks. Domo is the 2nd cheapest stock when compared to this plethora of companies with a forward Price to Sales = 3.5 (Purple line). Slightly higher than Teradata Corp which has a Price to Sales Ratio = 2.2.
Domo is cheap relative to historic multiples and industry peers, however the stock is overvalued intrinsically. The market is pricing in a 50% growth rate on their revenue which is higher than analyst expectations and management’s guidance.
As mentioned prior there are many alternative business intelligence platforms around. The major competition I currently see include Microsoft BI (Business Intelligence) and also Salesforce (which now owns Tableau, a great visualization platform). The good news is Domo has a 4.5 rating by Gartner which is 0.1 point higher than Microsoft BI and Tableau which have 4.4 stars.
Domo is a tremendous company, which is attacking the growing $100 billion big data market opportunity. They are investing aggressively for growth and are growing at a steady rate. The stock is undervalued relative to historic multiples but have a high intrinsic valuation. Given the variety of opportunities around right now given the major technology stock correction (see my other posts), I believe this stock is a prime candidate for the one’s watch list.