Is Domo Inc (DOMO) a Hidden Value Trap? A Comprehensive Analysis
Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Domo Inc (NASDAQ:DOMO). Despite its seemingly attractive valuation, certain risk factors associated with Domo should not be ignored. These risks are primarily reflected through its low Altman Z-score of -8.14. These indicators suggest that Domo, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors:
Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at.
GuruFocus adjustment factor based on the company's past returns and growth.
Future estimates of the business performance.
Altman Z-Score: A Measure of Financial Health
Before delving into the details, let's understand what the Altman Z-score entails. Invented by New York University Professor Edward I. Altman in 1968, the Z-Score is a financial model that predicts the probability of a company entering bankruptcy within a two-year time frame. The Altman Z-Score combines five different financial ratios, each weighted to create a final score. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates a low risk.
Overview of Domo Inc (NASDAQ:DOMO)
Domo Inc provides a cloud-based platform that digitally connects all the data, systems and people in an organization, giving them access to real-time data and insights and allowing them to manage their business from their smartphones. The company offers a platform to its customers as a subscription-based service. Users receive notifications on any device and immediately act on the invitation, after which the system can write back to the original system of record. The company derives revenue from subscriptions to its cloud-based platform and professional services.
Domo's Low Altman Z-Score: A Breakdown of Key Drivers
A dissection of Domo's Altman Z-score reveals Domo's financial health may be weak, suggesting possible financial distress. The Retained Earnings to Total Assets ratio provides insights into a company's capability to reinvest its profits or manage debt. Evaluating Domo's historical data, 2021: -5.93; 2022: -5.42; 2023: -6.18, we observe a declining trend in this ratio. This downward movement indicates Domo's diminishing ability to reinvest in its business or effectively manage its debt. Consequently, it exerts a negative impact on its Z-Score.
Conclusion
Given the low Altman Z-Score and declining Retained Earnings to Total Assets ratio, Domo (NASDAQ:DOMO) appears to be a potential value trap. Despite its seemingly undervalued price, the financial distress indicators suggest a high risk associated with this investment. As always, thorough due diligence is crucial in making informed investment decisions.
GuruFocus Premium members can find stocks with high Altman Z-Score using the following Screener: Walter Schloss Screen .
This article first appeared on GuruFocus.
