Domo currently trades at $7.45 per share and has shown little upside over the past six months, posting a small loss of 3.2%. The stock also fell short of the S&P 500’s 9.7% gain during that period.

We're swiping left on Domo for now. Here are three reasons why we avoid DOMO and a stock we'd rather own.

Why Do We Think Domo Will Underperform?

Founded by Josh James after selling his former business Omniture to Adobe, Domo (NASDAQ: DOMO) provides business intelligence software that allows managers to access and visualize critical business metrics in real-time, using their smartphones.

1. Declining Billings Reflect Product and Sales Weakness

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Domo’s billings came in at $73.4 million in Q3, and it averaged 2.6% year-on-year declines over the last four quarters. This performance was underwhelming and shows the company faced challenges in acquiring and retaining customers. It also suggests there may be increasing competition or market saturation.

2. Long Payback Periods Delay Returns

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

Domo’s recent customer acquisition efforts haven’t yielded returns as its CAC payback period was negative this quarter, meaning its sales and marketing investments outpaced its revenue. The company’s inefficiency indicates it operates in a highly competitive environment where there is little differentiation between Domo’s products and its peers.

3. Short Cash Runway Exposes Shareholders to Potential Dilution

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Domo burned through $18.73 million of cash over the last year, and its $129.2 million of debt exceeds the $40.93 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the Domo’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of Domo until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

Final Judgment

We cheer for all companies solving complex business issues, but in the case of Domo, we’ll be cheering from the sidelines. With its shares lagging the market recently, the stock trades at 0.9× forward price-to-sales (or $7.45 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment. We’d recommend looking at Microsoft, the most dominant software business in the world.

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