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Workday (WDAY) made its public debut on Friday. Shares of the leading provider of enterprise cloud-based applications for human resource services ended their first day up 73.9% at $48.69 per share.

The public offering

Workday offers human capital management solutions, payroll, financial management, time tracking, procurement and employee expense management services.

The company has achieved significant growth and a global scale in a short period of time. Workday was founded in 2005 by David Duffield and Aneel Bhusri. The latter ran PeopleSoft before Oracle (ORCL) bought the company. Since inception, the company has created a global customer base serving more than 325 companies. Its customer base includes large global companies such as Four Seasons, Kimberly-Clark (KMB), AIG (AIG) and Lenovo. Workday currently employs some 1,450 employees.

The company sold 22.8 million shares for $28 a piece. Workday raised $637 million in gross proceeds in the offering process. Based on the offer price of $28.00, the company is valued at $4.5 billion.

The offering is a great success. The offer price was set above the expected $24-$26 price range set by the company and its bankers. All of the shares offered in the offering were sold by the company. In total, 14% of the company's shares outstanding were offered. At Friday's closing price of $48.69 per share, the company is valued at $7.8 billion.

Major banks which brought the company public were Morgan Stanley, Goldman Sachs, J.P. Morgan, Canaccord Genuity and Wells Fargo, among others.

Valuation

Workday operates in the fast growing market of enterprise cloud-based software applications. Workday helps companies to better manage their financial and human resources. Its main competitors are other large ERP-based firms, including Oracle and SAP (SAP).

For the annual year of 2011, Workday generated revenues of $134.4 million compared to just $7.3 million in 2010. The company reported net losses of $79.6 million, compared to a loss of $5.5 million the year before.

For the first six months of 2012, the company generated revenues of $119.5 million, up 118% on the year. Net losses came in at $46.9 million, up from $36.3 million the year before.

Workday intends to use the proceeds of the offering to increase the company's financial flexibility. Net proceeds will be used for working capital and general corporate purposes.

Excluding the offering proceeds, the company operates with roughly $123 million in cash, equivalents and marketable securities. The company operates without any debt. Based on the severe losses, the $637 million in gross proceeds will boost Workday's net cash position to over $600 million.

As such, the valuation of Workday's operating assets come in at $7.2 billion. Based on a rough annual revenue estimate of $275 million for 2012, the market values the operating assets at 26 times annual revenues. The company is likely to report big losses for the full year. More relevant for investors might be future revenues. Workday estimates to have bookings of around $500 million for 2012, bringing the future revenue multiple down to 14 times annual revenues.

Investment Thesis

The offering of Workday is an incredible success. Initially, the company was supposed to go public for a price between $21 and $24 per share. Later this price range got revised upwards to $24-$26 per share, and eventually shares were sold for $28 per share. Shares opened with large gains on Friday and hit an intra-day high of $51.37 per share, closing at $48.69 per share.

As such, shares are trading some 116% above the midpoint of the first guided price range. Given the operational losses, the company does not expect to pay a dividend anytime soon.

The sentiment around the offering has been very strong, with many market commentators calling it a next bubble. Valued at 26 times annual revenues, Workday's valuation is absurd, despite the fact revenue growth exceeds 100% per year. Even if the company manages to double the annual revenues for this year, 2013 and 2014, the company is still valued at 5-6 times annual revenues.

While Workday is able to report significant revenue growth and operates in a long-term growth market, the valuation has become to excessive. Shareholders should be warned by Workday's own comments that the company is expected to lose money for a considerable period of time.

After shares more than doubled from the midpoint of the initially guided price range, shares have simply become too expensive. The business and industry prospects are very good, yet I remain very cautious on the back of a valuation which is sky-high. Serious value investors stay on the sidelines.

While I think the valuation is excessive, I am hesitant to initiate an outright short position given further potential of "bubble-valuations." The bulls are in firm control and most likely will point out the positive divergence between "revenue booking" and "reported revenues." As always, gravity will take over at some point and the shorts will be the winners.

Source: Workday - With Shares Trading Up 116% Above The Midpoint Price, A Next Bubble Is In The Making