Consumption Pricing And AI Integration Will Stabilize Future Performance

Key Takeaways

• Shift to a consumption-based model and AI integration boosts customer retention and revenue growth, leveraging high AI demand.
  
• Strategic partnerships and enhanced sales productivity improve sales pipeline, driving potential customer acquisition and profitability growth.
  
• Changes in pricing models and reliance on partnerships create short-term revenue uncertainties and ongoing profitability challenges amid a competitive market.

Catalysts

Operates a cloud-based business intelligence platform in North America, Western Europe, Canada, Australia, and Japan.

• Domo's accelerated shift to a consumption-based model is expected to drive higher customer retention and upselling opportunities, leading to increased revenue and improved net retention rates.
  
• The development of strategic partnerships with cloud-based data warehouses (CDWs) and system integrators (SIs) is enhancing Domo's sales pipeline, potentially leading to accelerated revenue growth through higher conversion rates and new customer acquisitions.
  
• Domo's focus on embedding AI capabilities within its platform positions it well for future growth, as AI-related solutions are in high demand, potentially driving increased revenue through value-added services.
  
• Significant improvements in sales rep productivity and alignment with the partner ecosystem paint a positive outlook for billings and profitability, signaling potential revenue growth and better operating margins.
  
• The company's efforts in extending contract lengths and moving more customers into multi-year agreements suggest enhanced revenue stability and predictability, contributing to better cash flow and margin profiles.

Domo Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Domo's revenue will grow by 4.4% annually over the next 3 years.
• 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 13.5% in 3 years.
• If Domo's profit margin were to converge on the industry average, you could expect earnings to reach $48.7 million (and earnings per share of $1.08) by about August 2028, up from $-74.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.4x on those 2028 earnings, up from -8.9x today. This future PE is lower than the current PE for the US Software industry at 38.7x.
• 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 9.04%, as per the Simply Wall St company report.

Domo Future Earnings Per Share Growth

Risks

• Domo's shift from seat-based to consumption-based pricing and changes in renewal timing have led to a $5 million shift in billings, which may create timing-related revenue uncertainties in the short term. [Revenue Impact]
  
• Despite positive cash flow in Q4, Domo is still operating at a net loss, with expected non-GAAP net loss per share for FY '26, indicating ongoing profitability challenges. [Net Margins/Earnings Impact]
  
• The reliance on strategic partnerships, such as with CDWs and SIs, contributes to sales success, but the variability and scalability of these partnerships make future growth and revenue prediction challenging. [Revenue Impact]
  
• The competitive landscape and consolidation in the data solutions market, including recent acquisitions by competitors, could potentially limit Domo's growth opportunities or pressure pricing models to maintain market share. [Revenue Impact]
  
• While macroeconomic conditions and conservative customer spending habits remain stable for now, any adverse macroeconomic developments could delay customer purchase decisions, impacting future sales and earnings. [Revenue Impact]

Valuation

• The analysts have a consensus price target of $14.5 for Domo based on their expectations of its future earnings growth, profit margins and other risk factors. 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 analyst's consensus, you'd need to believe that by 2028, revenues will be $360.6 million, earnings will come to $48.7 million, and it would be trading on a PE ratio of 17.4x, assuming you use a discount rate of 9.0%.
• Given the current share price of $16.34, the analyst price target of $14.5 is 12.7% 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.