Workday's (WDAY) stock price has defied gravity since its IPO. This is likely to change on April 10, 2013 when its IPO lock-up expires. Currently, there are 25.5 million shares in the float (source: Bloomberg). On Workday's March 7, 2013 earnings call, the CFO (Mark Peek) said, "Approximately 63 million shares, including more than 14 million exercisable stock options not currently included in our share count, will be available to trade after the lockup expires. These totals exclude shares held by insiders and those subject to Rule 144." Doing the math, the float could increase almost 250% over the next few trading days. With this much supply potentially coming onto the market, the price of the stock is likely to decline.
There is a critical distinction between a "good company" and a "good stock." Rational people can argue whether or not Workday is a good company, but over the next 1-2 weeks, WDAY is unlikely to be a good stock. The stock price is likely to sharply decline over the next week due to the flood of shares coming to market. It is likely current holders may trim or exit their positions in front of the lock-up release and it is likely hedge funds will establish short positions into the lock-up release. Both of these dynamics will likely depress the share price heading into April 10th.
Since January 1, 2013 WDAY has traded an average of 507,400 shares daily. The 63 million shares unlocking equal over 124 days of average trading volume. While these metrics are concerning, one needs to understand whether employees and holders subject to the lock-up are likely to sell on or around April 10. Refer to the CFO's quote above once more. The 63 million shares coming unlocked on April 10 do NOT include any shares held by insiders. Hence, most of the holders that are unlocking are regular employees and their WDAY stock is likely to be the vast majority of their net worth. I believe any rational person that has been restricted from selling his/her shares due to the IPO lock-up would be eager to cash-in given Workday's unsustainable valuation.
By any valuation metric, Workday is extremely expensive. Some refer to Workday as the poster child of the SaaS bubble. There are 161.9 million shares currently outstanding. The number of shares outstanding is likely to increase. From the Company's March 7 conference call, "Due to the large number of exercisable options becoming available in April, we are not providing share count guidance for the quarter." To be conservative, I will only use the 161.9 million shares currently outstanding for valuation purposes.
Workday is valued at an enterprise value of $8.77 billion. While the Company's revenue growth is strong, WDAY has been unable to convert any of its revenue into positive EBITDA, FCF or EPS. All three of these metrics are negative. We are talking about a company with an enterprise value of $8.77 billion that will continue to be EBITDA negative for years to come. Seriously, bubble much?? Given that Workday will be EBITDA, FCF and EPS negative for the next 2-3+ years (depending on the metric), we are left to perform comparable analysis using EV/Revenue multiples. Though there are numerous deficiencies in using this metric due to different margin and growth profiles, it is the best we can do. Here is a comp table provided by Jefferies.
Looking at the comps, companies with positive EBITDA and FCF are trading at a mean 2013 EV/Revenue multiple of 6.8x that is approximately 1/3 of WDAY's. The closest comps from a financial and growth perspective appear to be ServiceNow (NOW) and Cornerstone (CSOD) given these companies are expected to grow revenue 46% and 39% respectively (compared to WDAY's 52% expected revenue growth) in 2014. NOW and CSOD trade at an average of 7.1x 2013 EV/Revenue vs. WDAY's 20.2x 2013 EV/EBITDA. From a market cap perspective, Salesforce (CRM) and NetSuite (N) are closest, but both companies are EPS and FCF positive. It is hard to argue WDAY deserves a valuation premium to either of these companies, yet CRM trades at 6.3X 2013 EV/EBITDA and N trades at 13.5x 2013 EV/EBITDA. Go figure.
Even though WDAY is both EBITDA and FCF negative, if WDAY were to trade in-line with the set of comparable companies at 6.8x 2013 EV/EBITDA, WDAY would trade at $23.00. Further, if we assume the 14 million options that are exercisable as of April 10 are exercised, WDAY's share count would increase to 175.9 million shares outstanding and its EV/Revenue metrics would go even higher. Either way, WDAY is priced at a super-premium to other comps. This fact is not lost on the holders of WDAY's 63 million shares about to be released from their lock-up.
Given the potential 250% increase in the float that could hit the market in the coming days and WDAY's unsustainable valuation, I expect to see significant selling on/around April 10th and the stock to pull back to the high $40s or low $50s. I recommend shorting the shares into the lock-up expiration.