To anyone who has read my prior work, my fondness for Workday Inc. (WDAY 3.86%) is no secret. As noted elsewhere, I believe the company is still in the early innings of its growth.
Despite my affinity for the cloud provider, it isn't without its risks. Workday stock is prone to volatility, especially now that it's trading at 12 times trailing sales and its stock price has already run up about 50% year to date. But volatility, the traditional Wall Street measure of risk, is not what keeps me up at night. Given my time horizon of at least five years, I'm more concerned about risks that may permanently impair the company.
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If founders Duffield and Bhusri leave
Workday was co-founded by former PeopleSoft executives David Duffield and Aneel Bhusri. Mr. Duffield had founded PeopleSoft, which was ultimately purchased by Oracle (ORCL 3.44%) in a hostile takeover. Mr. Duffield now serves as the chairman at Workday. Mr. Bhusri, who ended his career at PeopleSoft as vice chairman, serves as CEO of Workday. He is also a partner at Greylock Partners, the venture-capital group that was an early investor in Facebook, Dropbox, and Airbnb.
Duffield and Bhusri are both reported to be billionaires; neither needs the money. They could live prosperous lives without the heartaches of running a 7,000-employee company -- especially Duffield, who is 73 years old. However, they continue to lead the company through aggressive growth. That dedication comes not from money, but from a desire to build something special. Also, despite their not admitting it publicly, I believe both Duffield and Bhusri are out for Oracle's blood.
I'm a fan of founder-led companies. With a dual-share class structure, Duffield and Bhusri have voting control over Workday and control its destiny. Given their expertise, past success, and pride in the business, I'm OK with that. However, if one or both were to leave Workday, that would be reason enough to sell my shares.
If employee culture is compromised
Cultivating Workday's employee-first culture is a big part of the company's strategy. Sports clubs, cocktail Fridays, yoga classes, and bringing dogs to the workplace are the norm at the company; Workday goes the extra mile for its employees, and it shows. The company is ranked highly as a top employer in lists from Fortune, Glassdoor, and LinkedIn. CEO Aneel Bhusri was also given an approval rating of 90% on Glassdoor, while 72% of employees would recommend Workday to a friend.
Whether or not the company can sustain a strong culture as it grows is questionable. Despite strong Glassdoor ratings, the ratings trend has recently come down, falling from an overall rating above four stars (out of five) in recent years to 3.8 stars today.
In the first-quarter conference call last year, Mr. Bhusri acknowledged the growing pains:
We've definitely had some growing pain over the last 12 months. Half of the employees have been at the company for two to two and half years. It's a topic that we've been on for the last six months. And one by one -- I read the Glassdoor stuff very carefully -- we're trying to get to the root of some of the issues, and I think we've addressed a bunch of them. In some cases we just needed to organize that functional area differently to adjust for scale. And candidly, we have a bunch of college grads that we needed, we have done a great job bringing them into the company; we've got a better job creating [a] long-term clear path for them ...
Headquartered in Pleasanton, California, Workday is a stone's throw away from where I live. Every encounter I have had with a current or former Workday employee has been positive, and most rave about the company.
However, as companies go from start-up to grown-up, there can be some challenges. Given Mr. Bhusri's focus on culture, I believe Workday can work through those challenges. But if I see further signs of a deteriorating workplace, it would be cause for concern.
If Workday Financial Management sputters
According to IDC estimates, the human capital management (HCM) market is estimated to be about $13 billion globally; by 2021, the HCM space is expected to grow to nearly $20 billion. With trailing-12-month revenue of $1.6 billion, Workday has captured a meaningful portion of the HCM market. Despite the gains in HCM software and Workday's potential in this space, this market alone is not large enough to justify Workday's valuation of 12 times trailing sales. Even executive VP Chano Fernandez hinted (in the June conference call) that despite HCM's global potential, the U.S. market may be close to reaching a saturation point, saying: "We are still in early days globally for HCM, the period that U.S. markets are more mature but opportunities outside of the U.S. remain robust."
Workday Financial Management is the company's foray into a much larger, yet more competitive, market. The total addressable market for financials is estimated to be $27 billion. The company has also begun providing financial and human-resource analytics tools that have a market potential of $19 billion. The company has shown early success in these markets, but it will need to continue to win customers and take market share for the stock to be a success going forward.
As a cloud-computing leader in HCM, Workday has proven itself to be a mighty competitor to nemesis Oracle. It is also looking to capture even more share in financials and analytics. Although Workday is not without its risks, with its strong leadership and dedicated employees, I believe the company is set up to do just that.
