- Utah-based Domo started trading on the Nasdaq on Friday.
- Despite the many red flags surrounding this company, its IPO is going well so far, with the stock popping 20% in the first few hours of trading.
- But the company’s regulatory filings were so loaded with red flags that the CEO of watchdog investor research firm New Constructs warned: “Investors should stay away from this IPO.”
Utah-based Domo started trading on NASDAQ on Friday, even as it earned distinction as one of the most eyebrow-raising IPOs so far of the year.
The IPO is going well so far. Domo priced at $US21/share, at the middle of its expected range of $US19 to $US22. And the shares are up about 19% to $US25 at the time of writing.
But the company’s regulatory filings were so loaded with red flags that David Trainer, CEO of watchdog investor research firm New Constructs published a blog on Thursday, after Domo’s initial stock price was announced, writing, “investors should stay away from this IPO.”
New Constructs uses AI to sift through company filings to find the red flags companies bury in their footnotes. Trainer himself is a former member of the Financial Accounting Standards Board and its Investors Technical Advisory Committee.
His blog explained why Domo earned New Constructs’ “Very Unattractive” rating.
The company offers a service that takes data from lots of sources and turns it into charts and graphs. It has a lot of competition from companies including Tableau and Microsoft.
The first red flag to Trainer’s mind is that Domo is burning through cash on its enormous sales and marketing engine that doesn’t seem to be that effective. Domo pent $US132 million on sales and marketing in 2017, or 121% of its revenue. That’s about double what other recent tech IPO companies have spent on sales – and yet Domo has only produced modest revenue growth compared to other companies.
Another red flag to Trainer is that Domo has maxed out its available credit, as Business Insider has previously reported.
Meanwhile, Domo’s valuation has plummeted. It raised about $US690 million since it was founded in 2010 at a valuation of about $US2.2 billion, plus another $US100 million or so in debt financing. However, this IPO values it around $US600 million, a fraction of its earlier valuation.
More worrisome to Trainer is that “CEO Josh James has revealed a troubling lack of judgment in the past” in regard to “a significant amount of self-dealing, such as leasing a jet and hiring catering and furnishing services from companies owned by James and his siblings,” he writes.
While the company said in a later filing that it terminated those relationships, Trainer points out another issue: Domo is using specific language to sell shares to friends and family that are not subject to the typical 90-180 day lock up period; they can be immediately sold, Trainer says.
On top of all that, Domo is using a dual-class structure to give James 86% of voting power on the 15% of the shares that he owns. Such structures have become increasingly popular with tech company founders in recent years.
It all adds up to some troubling indicators for this company and its new investors, Trainer believes.
“Domo has the unenviable distinction of earning the lowest return on invested capital (ROIC) of any of the 2,800+ companies we cover. With an ROIC of -344%, it lost over three dollars for every dollar invested in its business in 2017,” Trainer writes.
As to the pop of the price on Day 1, Trainer is unmoved. “A pop in the price of Domo would only make it more expensive and riskier,” he wrote.