Buy, Sell, or Hold: Workday

When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether it's possible upside outweighs its risks. Let's take a look at Workday (NYSE: WDAY  ) today and see why you might want to buy, sell, or hold it.

Founded only in 2005 and based in California, Workday already sports a market capitalization of about $8.5 billion. It's a specialist in cloud-computing-based applications, helping companies and government entities make use of the cloud as they manage payrolls, finances, and other processes. Improbably, before 2005 you may have known the company as North Tahoe Power Tools.

The company is newly public, having had its initial public offering just this past October.

Buy
One reason to be interested in Workday is cloud computing, which is growing briskly. Workday's revenue is growing briskly, too, with its quarterly revenue roughly doubling recently over year-ago levels. It added 31 new customers in its last quarter, for a total of 356.

Another plus is its management, which has some experience under its belt, unlike many other young companies' managements. Its co-founder and co-CEO, Dave Duffield, for example, also founded PeopleSoft, which was a powerhouse in enterprise software in its day, before being acquired.

Though the young company is still posting net losses instead of gains, its latest (and first, actually, as a public company) quarterly report featured a net loss of $0.39 per share, which was much better than the $0.57 loss that some were expecting.

If the idea of losses scares you, remember that the business model of such a company often involves more spending up front to get new business, but then to collect easier recurring revenue from maintenance and service contracts.

As the newly public company starts receiving the attention of Wall Street analysts, some are waxing rather bullish. The folks at Wells Fargo (NYSE: WFC  ) , for example, believe  that "in the next five years, Workday will be a significantly larger business than it is today."  Furthermore, "Workday has many competitive technical and business model advantages that should enable Workday to annually increase revenue by 50%+ over the next three years."

One negative about the company is also a potential positive: its growing short interest. As more investors bet against the company, it's in a better position to benefit from a "short squeeze," if its stock keeps rising.

Finally, there's innovation. The company is busy developing new products, such as applications for Big Data analytics and recruitment management tools.

Sell
One knock against the company is its newly public status. Plenty of IPOs do well, but overall, their tendency in their first few years is to underperform. More established public companies can offer you years of audited financial results to evaluate, for example, when fresh IPOs usually can't.

Another knock against Workday as an investment right now is its valuation. Consider that it's generating less than $300 million in annual revenue right now yet sports that $8.5 billion market price tag. With a negative price-to-earnings ratio because of net losses and a price-to-sales ratio recently topping 30 (versus 3.7 for its industry and 1.3 for the S&P 500), it's not exactly looking like a bargain.

Workday also faces some serious competition, such as from financial management specialist NetSuite  (NYSE: N  ) and integration services concern Informatica  (NASDAQ: INFA  ) , not to mention customer-relationship management giant salesforce.com (NYSE: CRM). In addition, while some such companies are focusing more on small and medium-sized businesses, Workday isn't being shy about going after big fish. That pits it, though, against rivals such as Oracle (NYSE: ORCL  ) and SAP (NYSE: SAP  ) . Some of its customers include Yale University, DuPont (NYSE: DD  ) , Johnson Controls (NYSE: JCI  ) , and JB Hunt Transport Services (NASDAQ: JBHT  ) .

Remember the bullish analysts I noted? Well, there are more bearish ones, too, including two of the company's underwriters, Goldman Sachs (NYSE: GS  ) and JPMorgan Chase (NYSE: JPM  ) , which levied "neutral" ratings on the company. It's important to note, though, that their reservations are valuation-based, as they seem to expect good things from the company over time.

Hold (off)
Given the reasons to buy or sell Workday, it's not unreasonable to decide to just hold off. You might want to wait, for example, for it to start posting net gains instead of losses and positive free cash flow.

You might also want to look at some of Workday's competitors with more proven track records, such as Oracle or SAP. Their valuations are far more attractive to boot.

The verdict
I'm holding off on Workday for now, but everyone's investment calculations are different. Do your own digging and see what you think. Remember that there are plenty of compelling stocks out there.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 09, 2012, at 9:27 PM, TD49ers wrote:

    Not sure why the foolish writer thinks Informatica is a competitor to Workday. Informatica and Workday are natural partners and do not compete at all.

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