Rising Compliance Costs And AI Disruption Will Erode Margins

Key Takeaways

• Rapid adoption of AI analytics and open-source alternatives threatens Domo's customer base, pricing power, and overall long-term revenue potential.
  
• Rising regulatory compliance costs and consistent unprofitability may compress margins and constrain future investment or shareholder returns.
  
• Expanded cloud partnerships, innovative AI analytics, and a shift to consumption pricing are improving growth, retention, operating efficiency, and setting a path for sustainable profitability.

Catalysts

Operates a cloud-based modern AI and data products platform in North America, Western Europe, Australia, Japan, and India.

• The rapid proliferation of AI-native analytics platforms threatens to make traditional business intelligence tools like Domo less attractive to enterprises, which could erode Domo's revenue growth as customers migrate to more advanced, integrated solutions with superior automation, directly impacting long-term revenue prospects.
  
• Escalating global data privacy regulations, including stricter US legislation and evolving GDPR and CCPA frameworks, will likely require substantial increases in compliance investments by Domo, resulting in higher ongoing costs that compress future net margins.
  
• A persistent lack of GAAP profitability raises the risk that Domo will need to dilute shareholders or cut critical investments if operating losses continue, leading to structurally weaker net margins and limiting any potential for improved long-term earnings.
  
• The accelerating migration of customers to open-source and freemium business intelligence solutions undermines Domo's ability to maintain pricing power, which will likely drive down average contract values and create headwinds for EPS growth and revenue expansion over time.
  
• Intensifying vendor consolidation among large enterprises favors the likes of Microsoft, Google, and Salesforce, marginalizing standalone BI players like Domo and shrinking its total addressable market, further restricting Domo's potential for sustainable revenue growth and ultimately capping future profitability.

Domo Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Domo compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Domo's revenue will grow by 4.3% annually over the next 3 years.
• The bearish analysts are not forecasting that Domo will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Domo's profit margin will increase from -23.3% to the average US Software industry of 13.4% in 3 years.
• If Domo's profit margin were to converge on the industry average, you could expect earnings to reach $48.3 million (and earnings per share of $1.07) by about August 2028, up from $-74.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 10.9x on those 2028 earnings, up from -7.7x today. This future PE is lower than the current PE for the US Software industry at 37.2x.
• Analysts expect the number of shares outstanding to grow by 4.15% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.15%, as per the Simply Wall St company report.

Domo Future Earnings Per Share Growth

Risks

• Domo's accelerating partnerships and deep ecosystem integrations with leading cloud data warehouse providers such as Snowflake, Databricks, Oracle, Google, and others are generating a rapidly expanding pipeline, higher partner-sourced conversion rates, and significant new enterprise deal flow, all of which are expected to drive future revenue growth and improve profitability.
  
• The recent and ongoing transition to a consumption-based pricing model removes adoption barriers, enables broader and deeper product usage across customers, and has led to higher sales force productivity, improved customer retention, longer contract lengths, and expanding contract values, which should directly benefit recurring revenue and net margins over time.
  
• Strong product innovation in AI-driven analytics, including launches like Agent Catalyst and advanced agentic automation capabilities, are demonstrating rapid and tangible value for customers and are fueling adoption, setting Domo up to capitalize on secular trends in AI and automation, strengthening its competitive position and earnings prospects.
  
• Subscription remaining performance obligations (RPO) grew 24% year-over-year, with long-term RPO up 61%, and cohorts on consumption pricing demonstrating higher retention and upsell activity, which derisks forward-looking revenue visibility and supports a sustained improvement in operating margin and earnings quality.
  
• Management's focus on operational efficiency has resulted in positive adjusted free cash flow, expanding operating margins, and the expectation of exiting the current and next year with 5% and 10% billings growth as well as operating margin, marking a notable improvement in financial discipline and signaling a credible path toward sustained profitability.

Valuation

• The assumed bearish price target for Domo is $9.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Domo's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $20.0, and the most bearish reporting a price target of just $9.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $359.3 million, earnings will come to $48.3 million, and it would be trading on a PE ratio of 10.9x, assuming you use a discount rate of 9.1%.
• Given the current share price of $14.12, the bearish analyst price target of $9.0 is 56.9% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.