Why Domo’s IPO Valuation Is Down Over 75% From Its Last Funding Round

SPY: S&P 500 logo
SPY
S&P 500

Domo Technologies is no longer on the coveted list of unicorns, with the business intelligence company recently filing to go public at a valuation of roughly half a billion dollars. The company, which intends to list its stock on NASDAQ under the ticker DOMO, is offering 9.2 million shares to public investors at a price range of $19 to $22. Considering the fact that the company will have just under 25 million in outstanding shares after an IPO (without the impact of an over-allotment option of 1.38 million), this works out to a valuation in the range of $475 million to $550 million – less than a quarter of the $2.3 billion valuation at its last round of funding in April 2017.

As we capture in our interactive model for Domo, the IPO valuation points to a revenue multiple of just 4x for the company – an unusually low figure given the fact that Domo has created a name for itself in the rapidly growing business intelligence industry. To put things in perspective, the company commanded a revenue multiple of roughly 21x just over a year ago. While inflated valuation multiples for private technology companies (especially those that make the unicorn list) could partly explain a decline in Domo’s valuation, there are a string of other factors responsible for the surprisingly low offer price, which we detail below.

Relevant Articles
  1. Beating S&P500 BY 11% YTD, What To Expect From Travelers Stock?
  2. Up 50% Over The Last 12 Months, Is Hyatt Stock Still Attractive?
  3. Capital One Stock Gained 44% In The Last 6 Months, What’s Next?
  4. Up 8% Year To Date As 5G Gains Traction, What’s Next For Verizon Stock?
  5. Up 32% In The Last 12 Months, Where Is BNY Mellon Stock Headed?
  6. Rallying 30% YTD, What’s Spurring The Rally In Applied Materials’ Stock?

Domo Is Critically Low On Cash

At the end of April 2018, Domo had just $72 million in cash on hand. While this is roughly 10% of the $690 million it raised over successive funding rounds over the years, it represents just a few months of operating runway for the company. In other words, Domo may not be able to sustain its operations for more than a few months unless it raises more money. Given the company’s relatively high cash burn rate, and its previous frothy valuation, it is reasonable to conclude that Domo was not able to generate much interest among private investors at a more attractive valuation.

The IPO, therefore, looks like an urgent effort for the company to raise cash before having to cut back on growth. And slashing the offer price was likely the only way in which the company could generate interest in its IPO to begin with.

The Dual Class Stock Structure Hurts Normal Investors

Domo’s dual class stock structure will give CEO Josh James 86% voting rights in the company, even though he will hold just around 15% of the company’s outstanding shares (Class A and Class B taken together) after the IPO. This essentially takes away investors’ say in the management of the company, and essentially puts absolute power in the hands of the CEO to make decisions regarding Domo’s long-term strategy as well as its day-to-day operations. A lower offer price compensates investors for the higher risk they take on due to this lack of control.

Domo Isn’t Likely To Turn Profitable Anytime Soon

Profits remain elusive for many disruptive multi-billion dollar tech companies, and are certainly not a critical criterion for long-term investment in these companies. However, the cash burn rate for startups is seldom this high as a proportion of revenues. Domo’s sales and marketing expenses stand out in particular – with the company spending an average of $125 million in sales and marketing annually. In the first quarter of 2018, Domo spent more than half a million dollars on average to add each new customer. In comparison, the average subscription revenue per customer is less than $60,000 annually per customer – indicating that it will take the company 9 years just to break even on the customer acquisition.

At the same time, Domo has a gross margin figure in the 50-60% range – much lower than the 80-90% range for many software and business intelligence firms. Third-party hosting services and data center costs are responsible for a bulk of the cost of revenues, and should grow at a slower rate going forward. But the company will continue to incur recurring expenses to keep its repository of 500+ connectors (used to gather data from multiple sources) updated while adding support for additional connectors.

Given the fierce competition in the business intelligence industry to attract new customers (especially enterprise users), these costs are unlikely to go down over the foreseeable future. This is especially the case since several of the largest tech giants in the world – including Microsoft, Oracle, SAP and IBM – are vying for a larger market share along with a long list of specialized players like Tableau and Qlik who have established a name for themselves over recent years.

Taken together, the three aforementioned factors make Domo’s previous valuation of over $2 billion (which represents an aggressive 15x revenue multiple) untenable going forward.  Accordingly, the substantially lower IPO valuation is Domo’s best bet to raise money quickly. What remains to be seen is whether Domo has been able to sweeten the deal for investors enough to generate sufficient interest in its IPO.

List of Interactive Valuation Dashboards For Other Multi-Billion Dollar Startups Including Uber, Airbnb And Xiaomi

What’s behind Trefis? See How it’s Powering New Collaboration and What-Ifs
For CFOs and Finance Teams | Product, R&D, and Marketing Teams
More Trefis Research
Like our charts? Explore example interactive dashboards and create your own