Workday - A Takeover Target

| About: Workday (WDAY)

Summary

Workday is a potential acquisition target by Microsoft.

Workday Management is solid, but the firm needs help developing the financial space.

Balance sheet is solid and cash flow burn is reasonable for a growth company.

The SaaS space is a crowded one, and the story is DOA for 2017. The cycle has started to top, with M&A activity setting a record in October 2016 as the latest sign that companies are struggling to achieve organic growth ( Zero Hedge). At this point, the large players like Salesforce (NYSE:CRM), Oracle (NASDAQ:ORCL), and Microsoft (NASDAQ:MSFT) have made large acquisitions while Workday (NYSE:WDAY) was left at the altar.

In today's global economy, Big Data and SaaS has to be a part of a large organization, and it appears that Workday will focus its attention on the public sector where they will focus their attention. The push into government entities and collegiate space is a red flag for a growth company. It indicates they are struggling to sell to the larger and more lucrative private sector. In fact, a review of the Workday press release web page shows most new clients so far in 2016 have been non-profits and colleges. Those accounts are amongst the most complex and least lucrative. I think Workday will soon exhaust their opportunities in this space, and it is only going to get more competitive for the next marginal customer.

Don't wait for the stock price to go lower! It does not have to for it to get acquired by a competitor. The balance sheet has held up well, with $400M in cash and barely a cash flow burn ( Fiscal 2017 Second Quarter Financial Results). They won't soon need more money. They had a successful IPO in 2012, a $600M note offering in June 2013 and a $600M secondary in January 2014 (JMP Website). Cash is not the problem for Workday, but rather a stall in how much further current management can take the firm. Clearly from the latest Workday Rising event, some competitor out there has very little respect for them. Sadly, they need an Angel, and now would be a great time.

They have a nice product, especially in the HR space. Let's face it, the firm was founded by HR pioneers David Duffield and Aneel Busri in 2007 as their swan song after PeopleSoft was taken over by Oracle. I think they fit squarely as a Microsoft Subsidiary. This presser shows the strategic partnership that was formed during this quarter. In fact, after the LinkedIn acquisition, and the fact that Microsoft does not have a true financial accounting offering, I think the next big deal will be here.

Workday Management will realize they do not have a good chance in the financial space on their own. For reasons best stated by Seeking Alpha author Mark Gomes titled " Is This Workday Nearing An End?" gaining new accounting clients is a challenging because of barriers to switching.

At the end of the day, there may be a surprise in the earnings tomorrow due to a lack of adoption in the financial software, but this is not a company to short. The next big catalyst will be a merger with Microsoft. It is not the time to short anything, not even tech, because while the valuation is high for a firm without a profit, Workday is a takeover target, and takeovers have huge upside potential.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in WDAY over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.