Domo ($DOMO) has attracted a fair bit of negative press as their IPO comes to market. Charismatic CEOs tend to be lightning rods for press attention. This deal reminds me a little of Switch (SWCH) or Snap (SNAP).

Some of the negative press is around “related transactions” which includes some services from “friends and family” like catering, interior design services, and some private jet use. These are immaterial to the story though since they add up to a total of $2.3M over more than two years and have been discontinued. Sure there may be some questionable judgment around these choices but they are a distraction.

If you haven’t reviewed the Domo IPO yet you can read our full IPO Candy roadshow transcript or just page through the DOMO IPO Slides.

The real questions are:

  1. Is there a real market for a “business data operating system” sourced from one vendor?
  2. How much of what Domo promises to have is real and operating at scale or more like sexy slideware?
  3. Given the business model and market opportunity how much is the stock worth?

A Business Operating System?

Companies have chased the mirage of a business operating system ever since the first database systems were installed. In the 1980’s these were called “Executive Information Systems” and were really glorified reporting tools that had some graphics. Skip forward to today and the business intelligence space has expanded dramatically and created multiple “layers” of functions to help enterprises manage their ever-growing operational data.

The gorilla in the data visualization and reporting part of this market is Tableau Software ($DATA) which has a $1B revenue run rate and an $8B market cap. There are other strong players in the DataViz space like Qlik Software which was acquired by Thoma Bravo in 2016 for $3B.

Domo is trying to differentiate themselves by offering a “full stack” solution for data – from loading to transforming to visualization to sharing to management and alerting. It’s a huge nut to crack and they’ve spent $300M to develop what they have.

In technology circles, this is described as taking a “moonshot” approach to building a brand new solution. Specifically, Domo proposes to supply nearly all aspects of data management, analysis, reporting, visualization, alerting and collaboration. Their full product stack is shown below.

What’s important to note is that for many of these layers there are already large established companies serving the market and years of investment from enterprises in building their systems and processes. We already mentioned Tableau in DataViz but other examples included newer companies like Talend ($TLND) in ETL, Cloudera ($CLDR) in data analysis and Alteryx ($AYX) in machine learning. There are also strong offerings across the spectrum from the big players including IBM ($IBM), Microsoft ($MSFT), Oracle ($ORCL) and Teradata ($TDC).

On top of all the functional layers, Domo lays claim to they purport to provide the security infrastructure needed to secure the data throughout the lifecycle.

A Solution or Slideware?

Domo has developed some good software. The best part is the interface and use of “smart cards” that show data and allow for much better navigation and collaboration – even on a smartphone. The “card” concept became popular in the developer community thanks to Trello which was acquired by Atlassian ($TEAM) for $435M in 2017.

This card metaphor is key to the Domo story and could be called their MVP. The big question is the “back end” that makes these cards work and the tools surrounding the data that customers need to truly collaborate.

We’ve included the Domo “vision” as shown in their S-1 filing below to share how they market to executives:

There’s no problem with the vision – the problem facing Domo is the reality. The Domo solution will work for departmental applications and will be effective in uniting some internal data with some cloud-based data. But it won’t work in an enterprise context.

The main reason is that enterprises have invested uncountable amounts of money in their data management infrastructure. We’d add IT security and collaboration as well. And it’s not just in the “horizontal” market of IT infrastructure but also vertically through application providers like Salesforce ($CRM), Workday ($WDAY) and HubSpot ($HUBS.)

No matter how much the CEO of a company wants the Domo system to work – it’s not going to change the entire enterprise. The one exception might be Jeff Bezos of Amazon ($AMZN) but he is literally one in a million.

The Business Model & Valuation

Domo sells their product online and then employs a direct sales model to convince large customers to agree to a larger subscription. Their marketing is aimed at the C-level executive in general and the CEO in particular.

The product isn’t selling itself – Domo spends more on sales and marketing than they book in revenue. For example last quarter (April) they spent $39M on sales and marketing and had $32M in revenue.

Basically, the go to market strategy doesn’t make sense. There are many smaller businesses that probably could completely run on Domo – and they could be converted into customers at much lower cost than the large enterprise. They would also be less likely to “churn off” due to the challenges of changing established enterprise IT infrastructure.

There’s also some question as to the “subscription” nature of the business. For example, Domo reported revenues of $108M for the year ended January 2018. However, they lost $12.4M of subscription revenue from customers that generated revenue in the prior fiscal year. That’s over 15% of the $74.5M in sales they had in 2017.

In order to come up with a constructive estimate of Intrinsic Value (IV) we have to assume that Domo will figure out a way to be successful using their approach and ultimately reach their target model. We can’t allow for 20% operating margins with a clear conscious but will give them the benefit of reaching 15%. (This in part due to slightly higher COGS and what we expect will be a stubbornly high cost of sales.)

For investors with belief in the company and their ability to execute the IV suggests that $DOMO can trade at $30/share.

A Cautionary Tale

I’d be looking at $DOMO more as a short than a long if it does well in the market. The CEO is no Steve Jobs or Elon Musk. If we look at how companies like $SNAP and $SWCH have done in the market there’s evidence suggesting the team matters more than the CEO in many of these cases. To be fair Square ($SQ) turned things around and so did Twitter ($TWTR) but there was plenty of pain before investors enjoyed gains.



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