Shareholders of Domo would probably like to forget the past six months even happened. The stock dropped 72.3% and now trades at $4.10. This may have investors wondering how to approach the situation.

Is now the time to buy Domo, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Do We Think Domo Will Underperform?

Even though the stock has become cheaper, we're cautious about Domo. Here are three reasons you should be careful with DOMO and a stock we'd rather own.

1. Billings Hit a Plateau

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.

Over the last year, Domo failed to grow its billings, which came in at $73.2 million in the latest quarter. This performance was underwhelming and shows the company faced challenges in acquiring and retaining customers. It also suggests there may be increasing competition or market saturation.

2. Projected Revenue Growth Is Slim

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 rise by 1.3%, close to its 9.8% annualized growth for the past five years. This projection doesn't excite us 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 represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

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

Domo falls short of our quality standards. Following the recent decline, the stock trades at 0.6× forward price-to-sales (or $4.10 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better investments elsewhere. We’d recommend looking at a dominant Aerospace business that has perfected its M&A strategy.

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