On Monday, Workday (WDAY) stock fell 3.1% as a continuation to last Friday’s loss.
WDAY stock is now 15% off its 52-week high despite recently announcing a very strong third quarter.
This decline in WDAY stock reflects a shift in sentiment, most recently stemming from a downgrade by Wedbush on fears that Oracle (ORCL) is a growing threat to Workday’s future.
WDAY stock owners, however, should not worry too much about ORCL.
Why WDAY Investors Fear ORCL
For the last six months or so, ORCL management has really been pumping its software-as-a-service product offerings.
Oracle noted that its Human Capital Management SaaS product, which directly competes with WDAY, added three times as many new customers as Workday’s competing HCM service.
Further, ORCL has mentioned during both of its last quarters that it expects a total of $1.5 to $2 billion worth of new SaaS/PaaS bookings this year, growing faster than WDAY at a 150% clip.
Based on this information alone, it is no wonder that WDAY stock has fallen into correction territory, and why investors are so worried about ORCL. However, there are many things about ORCL’s performance in SaaS that WDAY stock owners should consider.
ORCL’s Claim Is a Bit Misleading
For one, Oracle is not grabbing new market share, or growing organically, but rather sacrificing its traditional software license business to grow its cloud and application platforms, SaaS and PaaS. Earlier this year Oracle announced that it would offer 95% of all services via the cloud, up from about 60% in the past.
As a result, ORCL’s SaaS/PaaS revenue may be growing 34% to $451 million during its last quarter, but its much larger software licensing business declined 16% to $1.15 billion. Hence, Oracle takes from one business, gives to another, and then tells investors that its SaaS business is growing faster than Workday. While technically true, it is a bit misleading.
Meanwhile, WDAY’s growth is entirely organic, on track to grow 47% this year to top $1.15 billion in revenue. When you consider how both companies are growing, WDAY is clearly more impressive, and investors have to like its prospects in the human resource management industry.
WDAY Has Market Share to Gain
Pacific Crest estimates that the HRM industry is worth $70 billion, up from $50 billion in 2013. From this market, Oracle has a 12.4% share, and its from this share that ORCL has managed to grow its SaaS business. Oracle’s HRM market is created from SaaS, new licenses, and other software and services. However, WDAY operates entirely in the HRM space, and its growth suggests that Workday is gaining market share very quickly.
With less than $1.1 billion in market share over the last four quarters, WDAY’s current market share stands at about 2%. Therefore, WDAY still has the potential to grow its market share in the years ahead.
As a result, with WDAY stock well off its high, and competition fears regarding Oracle being responsible for much of this loss, investors will likely find big stock gains if buying WDAY on the weakness.
As of this writing, Brian Nichols did not hold a position in any of the aforementioned securities.
