Workday (WDAY), which operates a cloud platform for enterprise resource planning (ERP), has reported another blow-out quarter. Revenues surged by 74% to $159.7 million, beating the consensus estimate of $152.4 million.
Workday stock suffered from a big selloff over the past few months, as have most other cloud companies like ServiceNow (NOW), Veeva Systems (VEEV) and Cornerstone OnDemand (CSOD). After reaching an all-time high of $115 in late February, WDAY quickly tumbled to a low of $59.
For the most part, Wall Street has moved away from momentum stocks to value plays like Oracle (ORCL) and Microsoft (MSFT). But now it looks like the valuations for cloud stocks have stabilized somewhat, especially as the sector continues to show growth.
As for Workday stock, it does have a promising long-term future. ERP software is mission critical for companies, helping with functions like HR, inventory, payroll and financials. So when a company implements this kind of technology, it’s a major investment.
For WDAY, the focus is primarily on Global 2000 customers, who are tough to please. In other words, it would be far from easy for a rival startup to go after this market. As a result, much of the competition is from legacy operators, like ORCL and SAP (SAP), that have lagged with their cloud offerings.
In the latest quarter, WDAY demonstrated the scale of its solutions. For example, HP (HPQ) went live with its ERP implementation for more than 300,000 employees in more than 100 countries. Then there was Philips, which launched WDAY for more than 100,000 employees in more than 70 countries.
By being in the cloud, WDAY certainly has some key advantages. Updates are seamless because all customers are on the same code base and collaboration is much easier, whether from a laptop or mobile device. The interface is also intuitive, which allows for more usage of the software. What’s more, WDAY leverages the benefits of Big Data, providing a company with tremendous insights to make better business decisions.
WDAY has also continued to innovate its platform. To this end, the company recently launched Workday Recruiting, which takes a new approach applicant tracking. That is, the software leverages mobile and social medial.
It certainly helps that WDAY has two experienced co-founders, Aneel Bhusri and Chairman Dave Duffield. Keep in mind that they built PeopleSoft, which was the pioneer of the ERP space. So it should be no surprise that they know how to build a world-class technology that customers are willing to spend big dollars on.
But there is still the nagging issue of the valuation on Workday stock. No doubt, it is far from cheap, even after the selloff. Consider that it trades at a nose-bleed valuation of 32 times sales!
But then again, that kind of premium is expected for a company that has huge barriers to entry and an outsized market opportunity. According to Statista, the market for ERP software is expected to grow from $23.8 billion in 2011 to $32.6 billion by 2016.
Besides, WDAY is showing no signs of slowing down. In the latest quarter, the company added more than 60 new customers, bringing its total customers to more than 675. Billings also came to $208 million, which was well above the Wall Street consensus of $165 million.
Thus, for investors that are looking for a way to play the cloud, Workday stock does look interesting. True, there will probably be volatility with cloud stocks but this is normal for any fast-growing industry. But with WDAY, it looks like the company is still in the early stages — and it would be tough for competitors to get an edge. If you’re considering WDAY stock, now might be a good time to buy.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.