Domo Teaches Another Lesson About What Happens When High Growth Flames Out

Jon C. Ogg

It’s one thing to be a high-growth company that loses money. Wall Street often can look years out into the future to pay up for that growth. The problem that becomes harsh for investors is when high-growth companies that are losing money run into growth issues before their profitability starts kicking in. That can result in a very painful transitional period for shareholders.

Domo Inc. (NASDAQ: DOMO) appears to be having its worst one-day drop since its 2018 initial public offering. The company’s platform allows management and executives to look at real-time data all the way down the line of a company’s structure. Domo also recently announced key hires from Adobe, Microsoft and SAP to help customers achieve a digital transformation using the Domo platform.

The company lowered its revenue guidance for the fiscal year and now sees a wider loss per share than previously expected. Domo guided revenues to a range of $168 million to $169 million, down from $173 million to $174 million, and its loss per share is now pegged at $4.00 to $4.10, with the prior outlook was −$3.79 to −$3.87 a share.

One issue that has come up ahead of and after the earnings report is that the company’s message is unclear. Its 2019 revenue growth was expected to be almost 22%, and roughly the same in 2020. Unfortunately, the projected loss of $3.82 per share in 2019 and $2.73 in 2020 just doesn’t sit well with many investors at a time when the word “recession” is being thrown around by the media and investing community alike.

Credit Suisse gave up on Domo. The firm’s Brad Zelnick downgraded it to Neutral from Outperform and slashed its target price to $20 from $45. The reason cited for cutting that target by more than half was the underwhelming results, decelerating billings growth, challenges in its enterprise business opportunities and even its long-term unit economics. Zelnick did note that Domo’s retention rates were encouraging, but the reallocation of resources likely will cause near-term disruption that will take some time to play out, at the same time there are rising competitive threats.

Furthermore, JMP Securities maintained a Market Outperform rating on Domo but lowered its target price to $37 from $47, and Needham maintained its Buy rating but lowered its target price to $34 from $50.

Domo’s shares closed at $25.21 ahead of its recent quarterly report, and that was already down by almost half from its 52-week high of $47.08. The shares were last seen trading down 32% at $17.12, with a $465 million market cap. Domo’s 52-week low is still down at $13.28.

One additional concern about this drop is that there had been a pop to 1.4 million shares the prior day, with shares rising to $25.21 from $24.13, but Friday’s trading volume hit 5 million shares within the first hour of trading, if you include nearly 400,000 premarket shares. That’s already more than seven times a full day’s normal trading volume, and this is already about to be the largest trading volume since 5.9 million shares back on September 7, 2018, on less than a 10% drop at the time.

According to the Nasdaq, Domo’s short interest was 2.807 million shares as of mid-August. That’s lower than the three prior bimonthly reports but was still higher than it had averaged for most of 2019.