This Just In: salesforce.com Inc. or Workday Inc.? Cowen Says Just Buy Both

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.

But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our supercomputer tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best ...
When one of the best-known names in stockpicking picks not one -- but two -- of the best-known stocks in tech to outperform, we sit up and take notice. And so today, we cannot help but notice that the analysts at Cowen & Co. are singing the praises of struggling cloud computers salesforce.com (CRM -1.11%) and Workday (WDAY 0.35%).

It's a good thing somebody likes 'em. Fact is, over the past year, shares of both salesforce.com and Workday have struggled to hold investors' attention. Shares of salesforce.com are basically flat for the past year (actually down a fraction of a percent). Workday shares, meanwhile, are off by a good 8.5% even after receiving a boost from Cowen.

So, why does Cowen like them? As reported on StreetInsider.com Friday, Cowen likes salesforce.com as basically a market-share play, noting that if salesforce.com's mere "0.3% share of the avg. enterprise's budget" were to just double, this fact alone would drive "sustained high-teens billings growth." Indeed, Cowen foresees 20% growth in billings in fiscal years 2016 and 2017.

The future is even brighter for Workday (according to Cowen), where the analyst thinks "broadening distribution & cloud friendly end-markets should help sustain current billings growth north of 40% through F2017." As a result, while Cowen sees salesforce.com shares hitting $73 within a year, it's even more optimistic about Workday, hanging a $99 price target on the shares.

But is Cowen right about that?

Let's go to the tape
Maybe, maybe not. You see, we've been tracking Cowen & Co.'s performance here at Motley Fool CAPS for more than eight straight years now, and honestly, the best we can say about the analyst is that it's a so-so stockpicker in software stocks. Across 13 picks in eight-and-a-half years, Cowen's only gotten its calls right about 50% of the time -- and its losers are often bigger than its winners:

Source: Motley Fool CAPS

In short, while it's true that Cowen ranks among the better analysts we track here on CAPS (in the top 10% of ranked players, in fact), this analyst owes most of its reputation to a string of successes in biotech and pharmaceutical stocks. But software? Not so much.

And I can't help thinking this might not be great news for investors in salesforce.com and Workday today. After all, objectively speaking, and despite the relative weakness in share price of these two stocks over the past year, neither one looks like a great bargain to me today. Both companies currently showing negative profits on S&P Capital IQ -- and have done so for the past four years. True, both companies are free-cash-flow positive despite their weak GAAP performance. But consider how the valuations stack up.

Valuation matters
Unprofitable salesforce.com boasts $723 million in trailing free cash flow. Most analysts who follow the stock see profits growing strongly over the next five years -- indeed, with 27% annualized growth projected, most other analysts seem even more optimistic about the stock than Cowen is. But even so, the stock sells for a market cap of $37.1 billion, resulting in a price-to-free cash flow ratio of more than 51. That's pretty expensive -- even if the analysts are right about the growth rate.

Meanwhile, most analysts agree with Cowen that Workday will be a strong grower going forward. Indeed, the average expectation for profits growth at the company tips the scales at 50% annualized over the next five years (again, a faster pace than Cowen predicts). Growing off of a minuscule base of just $10.2 million in positive free cash flow over the past year, 50% growth doesn't seem unrealistic -- but neither does it justify the stock's truly immense market capitalization of more than $15 billion.

The upshot for investors
Call me crazy, or just call me a pessimist. I can't help thinking that these stocks' already too-high stock prices are part of the reason that neither one has gained a penny's worth of share price over the past year. I don't expect that will change until the valuations come back down to earth, either -- and I don't expect a few kind words from Cowen to do much to change the math.