What To Do About Domo (DOMO)
The situation from Domo has gone from bad to better, back to bad, and now to just plain ridiculous. At least, that’s the story the stock chart tells.
We held Domo after the disappointing quarter back in September, thinking that with the expectation reset there was a lot of upside in the stock should execution improve, which it did.
Lo and behold, shares rose over 80% from their October low and were on the verge of getting back into a price range where we started to have decent options; average down or sell at a tough, but palatable, loss.
Now, with the stock below its September lows, we’re back to square one. How did we get here?
We can almost entirely blame this on the virus everyone keeps talking about. DOMO fell with the market, and then even after delivering a decent quarter, continued to retreat, mainly because there is so much uncertainty out there. That uncertainty is magnified for companies that already lacked the full confidence of investors. In times such as these, lower-confidence stocks are often sold and the money is directed to higher-confidence names, which have also sold off, or simply held in cash.
But there will come a time when investors will look at Domo again. Before that, it’s relatively safe to say that strategic buyers (i.e. potential acquirers) are likely kicking the tires. I haven’t heard anything specific and don’t want to imply we should hang our hats on this potential for Domo. But the fact of the matter is this is the sole remaining independent business intelligence company of its kind out there after the major competitors were acquired. To ignore that there is at least potential for a sale would be somewhat foolish.
Beyond that, there are reasons to be a tad more confident in the long-term potential of the business after the Q4 fiscal 2020 report this week (though the short-term is obviously murky). Specifically, revenue was up 17.3% to $46.2 million (beating by $480,000) while adjusted EPS of -$0.85 beat by $0.11.
Billings came in ahead of expectations (at $65 million versus $57 million guidance) despite the lack of larger enterprise deals in the quarter. Recall that in September management talked about how they would pivot to focus less on enterprises and more on corporate deals because the smaller ones are easier to close and make for a more consistent business. Management hammered that point home on the most recent conference call, stating that such consistency will help Domo hit its numbers and then any larger signings are pure upside.
Furthermore, Domo appears to be keeping most of its customers, who also represent a good chunk of growth as they tend to spend more money with the company over time. Renewal rates are now over 90%, up almost 10 percentage points from a year ago. This helped cash flow beat expectations by a slim margin (-$15.2 million was $800K above guidance).
Of particular interest, they landed Amazon as a customer and analysts believe Domo’s solutions are being used in a key data governance use case. Amazon is a big fish, to state the obvious, and likely opened (and will continue to open) doors to potential customers.
While management said it doesn’t see a ton of disruption yet from COVID-19, it did say reliance on telesales (versus in-person) is high in the corporate market (enterprise requires more travel and in-person meetings) so that should help sales people keep plugging away. Still, guidance for 2021 revenue growth of 11% to 14% seems an appropriately conservative target given all that’s going on and gives management some room to exceed expectations.
Stepping back, this is a situation we’d much prefer not to be in. But here we are. While stocks can always go lower, Domo is so beat up that selling it all here seems a little silly. If this were a totally speculative penny stock that didn’t have a valuable asset (the platform), totally unknown management and no-name customers, it would be a different situation. But Domo isn’t that company.
At the same time, holding on forever is equally silly. A stock that’s low can always go lower. Let’s take the middle ground and sell half and see what develops over the coming weeks. That’s a hard pill to swallow, but as stated above, it will free up some capital that can be invested in other beat-up names in which we have higher confidence. SELL HALF
On a final note, because we all want some good news, Everbridge (EVBG) hit an all-time high today. The stock is now up 625% from when I first recommended it.