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Will Workday Miss Its Revenue Target?

|Includes: Workday (WDAY)

To answer the question right away: I think so.

As I tried to point out in a previous article, I believe that Workday (NYSE:WDAY) is a contemporary example of irrational exuberance, not seen since the bursting of the dot.com bubble.

In Workday's latest earnings call the company forecasted annual revenues as follows:

"For the year we anticipate total revenue of $420 million to $435 million or growth of 53% to 59%."

However, if we look at revenue over the last four quarters, we see that revenue growth is not accelerating. The company did not manage to add more than 10 million revenue each quarter. This means that in percentage the growth is actually decelerating, rather than accelerating. In order to reach its revenue target the company needs to add more than 10 million each of the next four quarters.

I see no reason why this should happen, given the past performance. Moreover Workday targets large companies as customers. These companies are mostly standardized on Workday's giant competitors like Oracle, Salesforce and SAP, who increasingly offer good cloud alternatives for Workday's products. I believe it will therefore prove more and more difficult to convince these companies to switch to the smaller, and thus riskier Workday, as the costs to switch to a new vendor are gigantic for large companies.

Guidance for the current quarter is not encouraging either. In fact, less than 10 million revenue growth is projected by management:

"we expect total revenues for the first quarter to be within a range of $83 million to $87 million..."

The midpoint of that range, 85 million, adds less than 4 million to last quarter's revenue of 81.5 million, well shy of the 10 million added in the previous quarters.

But let's stay optimistic and assume that Workday could keep the pace of adding 10 million revenue over each of the next four quarters. This would break down as follows:

Q1 90 million

Q2 100 million

Q3 110 million

Q4 120 million

This optimistic scenario, assuming no economic headwinds, totals to 420 million, the bottom of their revenue target range, which will be considered a miss.

Add to this that Workday is currently valued at 25 times that forward revenue (38 times trailing revenue) which makes Workday the most overvalued technology stock on Wall Street with a market cap above 1 billion. There is simply no other technology stock with a market cap above 1 billion and a price to sales ratio above 22. ARM Holdings (NASDAQ:ARMH) and Splunk (NASDAQ:SPLK) come close, but ARMH is very profitable and Splunk is nearing break even. Yet these companies are considered very expensive at these levels. Add to that the fact that Workday projects to increase its net operating loss (a whopping 119 million over the past year), plus the fact that the lockup period expires on April 10, and it is safe to expect that the odds for disappointments far outweigh the odds for pleasant surprises.