ANALYSIS: Why Is the DOMO Stock IPO Shrouded in Negativity?

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DOMO Stock IPO Had a Rough Landing

Since optimism is the resting pulse of Silicon Valley, I tend to read most press releases with a sprinkling of salt. However, I didn’t need any for last week’s DOMO stock initial public offering (IPO), given that the market was deeply skeptical of Domo Inc (NASDAQ:DOMO).

It was a weird situation. Domo went public on June 29, with one of the worst S-1 filings I’ve ever seen. For weeks, the company tried to spin its poor financial situation, but that’s difficult to do while taking a 78% haircut from your previous valuation. (Source: “Domo Inc S-1/A Form,” U.S. Securities and Exchange Commission, June 18, 2018.)

Last April, a private financing round pegged the Domo valuation at $2.3 billion. 14 months of rapid cash burn later, the S-1 form revealed gross mismanagement of resources, including possible self-dealing by CEO Josh James.

Investors were—I think justifiably—outraged.

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Domo responded by slashing three-quarters of its valuation. It said it would now seek a DOMO valuation of $510.0 million. And, oddly enough, it cut ties with three vendors that had initially sparked the rumors of self-dealing, a move that some might call a tacit admission.

The weirdest part of the S-1 changes, however, was the addition of a directed share program.

Previously, Domo was adamant that none of its executives or directors would be able to buy discounted shares as part of the Domo stock IPO. But after investors got wind of its shady dealings, the company revised its S-1 to include the following:

At our request, the underwriters have reserved up to 690,000 shares of Class B common stock, or 7.5% of the shares offered by this prospectus, for sale at the initial public offering price to individuals through a directed share program, including our directors, executive officers and employees, as well as friends and family members of our executive officers, founders and certain members of senior management, and persons with whom we have a business relationship, including employees of certain customers and suppliers. If purchased by these persons, these shares will not be subject to a lock-up restriction, except in the case of shares purchased by any director, executive officer or employee, which will be subject to a 180-day lock-up restriction.

(Source: Ibid, emphasis added.)

Here’s what I think happened: Domo’s underwriters expected an oversubscribed IPO, but demand came in low due to the bad press.

As a result, the company opened up insider buying to anyone who so much as shook hands with a Domo employee. Friends, family, neighbors, acquaintances, dog-walkers, babysitters, an old high school teacher—they want anyone and everyone to buy these shares!

Has the DOMO Pricing Corrected Enough?

After taking the 78% haircut, Domo stock went public at a lowered price range of $19.00 to $22.00.

The first day went well. DOMO started trading at $23.80 on Friday morning, rising to $27.30 by the end of the day. It was a 30% return.

Chart courtesy of StockCharts.com

But that good fortune dried up over the weekend. DOMO stock opened its second trading session down six percent. And at the moment I’m writing this, it is trading at around $23.69.

But let’s backtrack for a minute.

What does Domo do, exactly? The term “analytics” is too broad to be useful. So let’s try to be a little more specific. I don’t want you just looking at the financials and ignoring the business side of things.

From what I can tell, “Domo” is software that companies can use to consolidate their data. It has five main uses:

  1. Marketing
  2. Data visualization
  3. Analyzing data for trends and patterns
  4. Automating reports
  5. Remote access

Are these are technological breakthroughs? No. They existed long before Domo, but the company offers all five in a neat package that’s supposedly greater than the sum of its parts.

Does it have potential? Sure. Helping companies make sense of their data is a good way to go in today’s economy. But it’s probably a good idea to turn profits along the way, and that’s where Domo falls short.

In 2017, the company lost $3.00 for every dollar it invested in its business. Its sales and marketing costs were 121% of revenue, meaning the firm had negative cash flow merely by acquiring new customers.

If this emphasis on sales led to something—let’s say three-times or four-times revenue growth—then no one would be complaining. But it hasn’t. That’s probably not a good sign.

Analyst Take

The heart of Domo’s problems isn’t profligate spending or a sticky-fingered CEO—it’s that sales aren’t moving fast enough for us to overlook those issues.

Though it pains my contrarian heart, I have to side with the majority of analysts on DOMO stock. Investors are likely better off sitting this one out. There are simply one too many issues for CEO Josh James to handle.