Workday Has Emerged As The Best Cloud Company

| About: Workday (WDAY)

Summary

With the stock still down roughly 33% from its 52-week high, Workday's vacation is over.

On the basis of long-term revenue growth and market share gains in SaaS and ERM, these shares are a sure-bet to reach $100 by the end of the year.

Workday has (seemingly) more business than it can service, which is a problem every company wants to have.

Due to valuation concerns, software stocks have been hit hard in 2014. And very few have taken a pounding to the extent of Workday (NYSE:WDAY), whose shares are down more than 30% since hitting an all-time high of $116 on Feb. 28. Shares closed Friday at $78.30, down 6% year to date. But it's not yet time for panic.

As with Salesforce.com (NYSE:CRM), Workday is a disrupter in the enterprise software market. The company has built itself into a dominant Software-as-a-Service (SAAS) provider and has stolen share from the likes of IBM (NYSE:IBM) and SAP (NYSE:SAP). And when you factor in Workday's capabilities in human capital management software, the company is running laps around companies still running traditional business models based on contracts and bundled licenses.

Workday, by contrast, offers cloud-based services that help enterprises operate daily HR tasks, including payroll and employee benefits. And with better-than-expected earnings results just released from Salesforce, I don't see a scenario where Workday's growth engine will slow any time soon. The company will report fiscal first-quarter earnings Tuesday. And investors still on the sidelines would be wise to punch in their time cards now.

The Street will be looking for revenue of $152.3 million, which represents a 66% year-over-year jump. The company is expected to match last year's loss of 15 cents per share (excluding items). For the full year, the company is expected to post a loss of 55 cents per share on revenue of $735 million, up 57% year over year.

Over the past couple of quarters, Workday has done well securing large multimillion dollar deals. When compared to larger players like Oracle (NASDAQ:ORCL), Workday believes it can offer similar-to-slightly-better services at half the cost. Not to mention, it can offer these services without licenses and long-term maintenance contracts. Enterprises have responded in a big way.

To that end, on Tuesday, investors should focus on the company's billings metric, which denotes the strength of future sales. Workday has performed well in this department as billings have stayed above 30% for the past couple of quarters. Some of this has been the result of aggressive discounting and various promotions.

More than anything, this has been what has kept value investors at bay. The margin situation hasn't been pretty. But profitability is not what the Street is paying for today. The company is seeing increased demand for its services and demand for its expertise in human capital management solution.

And when it comes to enterprise resource planning (ERP), Workday has (seemingly) more business than it can service, which is a problem every company wants to have. Management has begun to address this need with investments in its capacity. And this, too, will take a toll on near-term margins and profits. But the bet is that it will all be worth it in the end.

With the stock still down roughly 33% from its 52-week high, Workday's vacation is over. On the basis of long-term revenue growth and market share gains in SaaS and enterprise resource planning, these shares are a sure-bet to reach $100 by the end of the year.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Wall Street Playbook's tech sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.