Investors should understand that these are different from the basic database applications Salesforce took its stock symbol from. They're different from the cloud enabling technologies of IaaS and PaaS. They're different from running office applications that save to a large data center.
We're talking here of native applications that address the cloud as a single computer, and use the data large companies have stored there to make change happen in real time.
Workday itself is an example of such an application. It's not just a storage system for resumes to be used by a single department. Workday is evolving Human Resources Management into a tool that can be used to create teams of compatible people, evaluate the availability of skills and salaries that should thus be offered, and that can drive the way the company is organized.
Salesforce's "secret sauce" is its AppExchange, which takes clients well behind customer relations management and lets them run their whole company off Salesforce, just as other companies run on Microsoft (NASDAQ:MSFT) or Google (NASDAQ:GOOG) (NASDAQ:GOOGL).
Salesforce's success has been a great mystery to some analysts, because it doesn't deliver the full economic benefits of cloud, running instead on proprietary servers from Oracle (NYSE:ORCL) and Oracle databases. What the company has done, instead, is turn its software into the heart of a large ecosystem, more like Microsoft Windows or Apple's (NASDAQ:AAPL) OSX than a database. This is giving it an extraordinary growth rate - $3.6 billion in revenue for its first three quarters against $4 billion for all of last year, which makes the stock attractive despite a general lack of profits.
The story at Workday is similar, only more so. Quarterly sales are up 16%, after raises of 10%, 11% and 16% for the previous quarters, so that losses that are actually accelerating - $69 million lost on $187 million in sales for the latest quarter - don't disturb investors, who point to a relatively low debt-to-assets ratio of 25% and an asset base that's growing exponentially to support their choice.
The problem here is obvious. These are growth stocks, mini-Amazons (NASDAQ:AMZN) if you will, and when growth goes out of fashion - as it has recently - they can't move forward. Both stocks are up over the last month by about 8%, but down substantially over the last six months and close to flat for the year to date. They're stocks you trade, momentum stocks, not true investments, unless you think Mr. Toad's Wild Ride was a good investment.
You can also see this in Workday's latest earnings release, which came out on Wednesday. Subscription revenue was up 77%, and the customer count rose from 678 to 800, including Bank of America (NYSE:BAC). The revenue forecast for the year was raised slightly, and the company expected to have billings by year-end of nearly $1 billion.
Happy days, right? But the net loss widened and that's not in fashion so yesterday it lost nearly 5% of its value, starting today at about $86/share. That's the way it is. When people decide they want growth again the shares will recover - Amazon.com also fell hard in Thursday trading - and investors need to be prepared for bad things that have nothing to do with their company's fundamentals as a result.
The importance of these companies is that they herald the next evolution of cloud, away from infrastructure or platforms into full-fledged database-based solutions that companies will consider as bolt-ons for existing infrastructure and, eventually, as replacements for that infrastructure. Software that can address the cloud as one system, and really use that power to drive organizational change, is going to be incredibly valuable over the next two years, and every large software provider is going to have to be there if it is to survive.
You buy these on weakness. If the troubles in Ukraine get worse both these stocks are going to be badly hurt. That's when you want to go in.
Disclosure: The author is long GOOG, GOOG, AAPL, AMZN.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.