We actually cannot deny that the economic system is belt-tightening and plenty of corporations are going to really feel the pinch of macro headwinds all through the vast majority of this 12 months. On the similar time, nonetheless, final 12 months’s pessimism could have taken valuations down too far – particularly amid small and mid-cap progress shares.
Domo (NASDAQ:DOMO) is a superb instance of this. The enterprise intelligence (BI) software program supplier has seen its inventory value crash by greater than 65% over the previous 12 months. And though the corporate has certainly seen a bona fide slowdown in its progress trajectory, there are nonetheless sturdy deserves to name out that do not warrant the inventory’s slide to an ultralow valuation. It is a good time, in my opinion, for buyers to re-assess the bull case right here.
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I stay bullish on Domo and am holding onto it for a restoration in my portfolio. Plainly the market has at all times had a motive to guess towards Domo: within the early days of its IPO, pundits warned that the corporate’s excessive losses have been insurmountable and that it will rapidly run out of liquidity. Quick ahead to at the moment: and even whereas Domo’s progress has slowed down (primarily attributable to macro-driven elements), the corporate has surpassed breakeven professional forma working margins, and the market nonetheless would not like this identify. For me, it is a good time to spend money on Domo whereas the market is trying the opposite method.
Right here is my full bullish thesis for Domo:
- Enterprise intelligence is a very horizontal, wide-open market. Although many corporations could also be laying aside their digital transformation initiatives within the face of present financial headwinds, the traits towards information mining and information visualization are extremely clear and relevant to corporations in all industries. Domo enjoys secular tailwinds on this regard that, in my opinion, are nonetheless within the early innings.
- There’s some proof that competitors arguments are overblown. One of many unique criticisms of Domo is that it performs in a closely aggressive BI area towards different powerhouses like Tableau (now owned by Salesforce.com) and Microsoft Energy BI. Domo founder Josh James is of the assumption that many Domo prospects aren’t precisely seeking to rip out their present BI methods, however to complement them with different merchandise for various use case. So whereas there’s actually competitors, it is probably not a dealbreaker for a lot of prospects.
- Excessive professional forma gross margins. Domo’s subscription professional forma gross margins are north of 80%, which provides the corporate loads of room to scale its operations profitably because it grows.
- Domo is closing the profitability hole. The corporate is trending towards professional forma profitability in FY24, which ought to be an enormous tailwind to the inventory.
- Acquisition risk. Whereas it is by no means sensible to financial institution a whole funding resolution on hoping for a takeout, Domo is a really small firm with a compelling expertise platform and recurring income. I might simply see a bigger software program firm wanting to soak up Domo into its portfolio.
Domo’s current tumble has additionally put its valuation into very engaging ranges. At present share costs close to 15, Domo trades at a market cap of simply515.4 million. After we internet off the 83.6 million of money and104.0 million of debt on Domo’s most up-to-date stability sheet, the corporate’s ensuing enterprise worth is $535.8 million.
For subsequent fiscal 12 months FY24 (the 12 months for Domo ending in January 2024), Wall Road analysts expect the corporate to generate $337.1 million in income, representing 10% y/y progress. This places Domo’s valuation at simply 1.6x EV/FY24 income – in brief, a steal.
There is not any doubt that investing in Domo requires endurance – however in my opinion, particularly with the corporate’s current enhancements to profitability, there are many catalysts to drive this small-cap firm upward. Keep lengthy right here.
Whereas billings progress was a sore spot for Domo, it is a stretch to say that the corporate’s current traits are solely dangerous. Check out the Q3 earnings outcomes beneath, launched in early December:
Domo’s income in Q3 grew 21% y/y to 79.0 million, beating Wall Road’s expectations of76.3 million (+17% y/y) and truly accelerating barely over Q2’s progress charge in 20% y/y.
We could warning, nonetheless, that Q3 progress charges could also be a little bit of a head pretend. Domo’s steering for This autumn of 77-78 million implies a variety of 10-11% y/y progress (although Domo has usually set comparatively conservative targets that it simply crosses).
Billings is one of the best indicator of the upcoming progress slowdown – as seasoned software program buyers are conscious, billings is a superb metric for capturing a software program firm’s progress trajectory because it captures offers indicators din the quarter that will not get acknowledged as income till future quarters. Q3 billings of $74.0 million truly fell beneath income on a nominal foundation and grew solely 5% y/y – implying that the corporate drew down on its deferred income backlog.
The corporate notes that gross sales progress has been stable for its enterprise/company gross sales groups, however macro headwinds have slowed down deal progress. Per CEO Bruce Felt’s remarks on the Q3 earnings name:
Based mostly on the modifications we introduced final quarter, we have seen good manufacturing from our company gross sales crew the place we’re placing incremental focus. Moreover, we’re seeing progress from our enterprise crew and new emblem and upsell alternatives and proceed to supply transformational experiences for a few of the largest corporations on the earth […]
By way of the macro atmosphere, we’re seeing offers extra scrutinized and slowed, leading to and are seeing some early indicators of pipeline growing older with accounts of all sizes. We aren’t but clear on how lengthy this pattern will proceed, however we’re conserving a detailed eye on it. Regardless, we do not see this as a mirrored image of Domo’s worth proposition as our win charges stay persistently sturdy, and we proceed to see sturdy high of funnel demand.
With at the moment’s market circumstances, whether or not or not it’s the macro economic system, provide chain points or shifting enterprise priorities, corporations are confronted with learn how to optimize their present processes, and learn how to do extra with much less, significantly with how they drive motion with real-time information of their organizations. Firms are on the lookout for expertise options that present a compelling enterprise influence and accomplish that in document time.”
Additionally driving billings contraction is the fact that the company is currently at a lower total quota capacity, due to turnover and change in its sales organization. The company noted, however, that turnover had improved in the last months of 2022, and the company still plans to increase sales capacity in calendar 2023 (with an emphasis on ramping sales reps that have already been hired, rather than aggressively chasing new hires).
Even while these growth comments are slightly discouraging, we do have to look at the picture in totality: Domo has taken advantage of this time to rein in profitability. As seen in the chart below, pro forma subscription gross margins jumped two points to a sky-high 85%:
The company has also begun the process of moving more of its staff to low-cost areas. Opex savings overall have helped Domo boost its pro forma gross margins by twelve points to 1%, from -11% in the year-ago quarter. Domo continues to expect full-year pro forma profitability by FY24.
The mainstream market has all however discarded Domo, however I believe there is a comeback story right here particularly as Domo hones in on profitability, which was lengthy a black mark for the corporate. At a <2x ahead income valuation, there actually is not a lot to lose.