Workday (WDAY) is the leading pure play cloud computing company focused on providing human resource (HR) services. It has the only HR cloud service built on modern object oriented database technology. This compares to the 1970s era relational database technology still employed by Oracle (ORCL), its principal competitor. Oracle's relational database technology was developed at a time when local storage was expensive and scarce so the amount of space available for each record was highly constrained by the total size of the rows and columns in the database. Oracle has modified its database somewhat with its latest 12C version but some are calling the result "fake cloud."
By contrast, Workday's object oriented database technology on which its HR cloud offering runs has far fewer constraints and can make use of the efficiencies available by storing employee and other HR records in the cloud storage provided by Workday to its customers. A major advantage of this is being able to have employee records for every point in time, including all the changes and events that occur over time.
To date, most of Workday's customers are mid-size organizations with up to 100,000 employees. But increasingly, Workday is competing with Oracle at larger customers as well. These large organizations are where Oracle is strongest.
One sign of how Workday is a "new tech" company taking market share from the "old tech" Oracle is there is a continual flow of employees from Oracle to Workday and very few from Workday to Oracle. One reason for this is Workday is a very employee-focused company and is considered a great place to work.
Recall, Workday was founded by the former management of PeopleSoft after Oracle acquired PeopleSoft in a hostile takeover eight years ago by raising the price until institutional shareholders decided to sell.
Workday is viewed as an exciting place to work in Silicon Valley with many highly skilled people seeking employment there. But it is challenged enough to find top quality cloud-experienced software engineers that it is just one of many companies that could benefit from passage of the pending immigration bill being considered in Washington. That passage would provide many additional visas so that companies like Workday could hire more immigrant engineers from places like India.
As is the case with most high growth businesses, there are points of controversy relative to Workday. But the company also has many strengths and the opportunity to build a much larger company in the fast growing cloud-computing sector. Cloud computing and Big Data are the principal growth areas within the overall quite flat global enterprise IT marketplace.
Workday shares do carry the kind of mid-teens multiple to revenues valuation afforded to the highest potential, fastest growing companies with the potential to become multiple times larger. The company is still in the early stages of exploiting the global cloud-based HR and financials market opportunities. And with only 172 million outstanding shares, if revenues over the next several years continue to grow at 50% per year, in 3+ years earnings could approach $4.00 per share assuming 30% operating margins and a 20% tax rate. In its April FQ1, Workday revenues increased 61% YTY and 12% sequentially. At today's $64 stock price, the current P/E on those potential calendar 2017 earnings is reasonable.
And the valuation is perhaps quite conservative if Workday is highly successful with its new cloud-based financials offerings for that market that is much larger than the HR market. Many of its customers are highly interested in what Workday is promising in the financials area, especially the mid to larger-size companies. In fact, Workday almost has to perform as it sometimes closes HR deals with assurances to clients that it will soon provide the cloud-based financials it is beginning to introduce.
Workday is an excellent example of what we look for in a high growth company in a hot new sector like cloud computing. It meets many of the criteria described in our recent article "Technology Stock Investing - Keys To Success." It is on several major new product cycles with innovative technologies that address large markets. And it is still early in its global expansion. And this management has a proven track record.
Workday shares have performed well and we expect them to continue to do so over coming quarters and years. They are up 128% from the $28 IPO price last October, up 28% from where they traded the first day following the IPO and up 16% since their recent low April 10th, the day the IPO lock up released. Workday shares did decline in front of that lock up release, but when the employee and investor selling turned out to be modest, rebounded nicely.
This appreciation from the IPO lock up release date is quite typical with high quality, high growth companies with very positive outlooks. We suggest keeping this in mind relative to future IPO lock up releases of high potential companies. Especially if the total shares outstanding is modest like is the case with Workday.
Typical of the most innovative "new tech" companies, there is hidden value for shareholders in that there are likely many new things in development that will come to market that cannot be seen from outside the company today.
I recommend purchase of Workday shares in growth portfolios.