CAPScall of the Week: Workday

For years, satirical late-night-TV host Stephen Colbert has been running a series on his show called "Better Know a District," which highlights one of the 435 U.S. congressional districts and its representative. While I am no Stephen Colbert, I am brutally inquisitive when it comes to the 5,000-plus listed companies on the U.S. stock exchanges.

That's why I've made it a weekly tradition to examine one seldom-followed company within the Motley Fool CAPS database and make a CAPScall of outperform or underperform on that company.

For this week's round of "Better Know a Stock," I'd like to take a closer look at Workday (NYSE: WDAY  ) .

What Workday does
Workday is a provider of enterprise cloud-based applications for human capital management payroll, financial management, time tracking, procurement, and employee expense management. According to its prospectus filed in late August, the company has 325 customers and roughly 1,452 employees.

Workday has been growing at an incredible pace since its founding in 2005. Revenue has grown from just $455,000 in 2007 to $134.4 million in its most recently ended fiscal year, for a ridiculous compounded annual growth rate of 314.6%. Since then it has gained some high-profile customers across a wide swath of sectors, including Flextronics and Kimberly-Clark (NYSE: KMB  ) .

Workday's competitors
The unique aspect of Workday is that few of its peers have the full suite of human management applications that it offers. Its closest competitors are payroll service Automatic Data Processing (Nasdaq: ADP  ) , as well as software firms SAP (NYSE: SAP  ) and Oracle (Nasdaq: ORCL  ) . Workday's cloud-based software requires fewer updates than ADP, SAP, or Oracle's software, so its biggest advantage can often be seen in its ease of use.

It's also worth noting that many of Workday's peers aren't focused on the human capital management side of their cloud business at the moment. Oracle is too busy trying to work out the kinks in its Sun Microsystems hardware division. SAP has done a pretty good job of integrating in SuccessFactors, but has plenty of issues to deal with regard to spurring spending in Europe. ADP is dealing with low returns from record-low interest rates and weak employment figures.

The call
After carefully reviewing Workday and its peers, I've decided to join the CAPS majority and overwhelmingly slap an underperform rating on the company.

You might be wondering how I could pull such an about-face after noting some of its clear advantages above? One key factor that I failed to mention with regard to its peers is that they're all healthfully profitable and each pays out a dividend. Those are both luxuries you won't be getting with Workday anytime soon.

Workday's financial statements allude to rapid growth, but they are downright ugly when it comes to the bottom line. Rising costs have ballooned losses from $24.7 million in 2007 to a whopping $79.6 million in its recently ended year. Cumulative losses attributable to stockholders since 2007 are a scary $267 million. Furthermore, this rapid growth seems moot when compared to an $8.8 billion valuation. Even if I were nice and extrapolated out the $119.5 million it's derived in revenue through the first six months of its current fiscal year, Workday is still valued at 37 times sales... thirty-seven!!! Page 42 of its S-1 clearly states that the company's plans for research and development will likely keep it in the red for the near future. I believe they may want to change that wording to "at least the next three years," based on my best guess. With that being said, I see no value left in this cloud-computing software play and expect it to underperform moving forward.

Workday may not be everyone's cup of tea, but three companies highlighted by our analysts at Stock Advisor could be perfect to help you retire rich. Find out the identity of these stocks, for free, by clicking here to get your copy of this latest special report.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Oracle. Motley Fool newsletter services have recommended buying shares of Kimberly-Clark and Automatic Data Processing. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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