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Earnings Preview: Will Workday Keep Working for Investors?

The valuation is certainly not cheap at current levels


When Workday (WDAY) went public back in October 2012, the stock surged 74% on its first day of trading. But the gains didn’t end there, and the company has gone on to gain about 171%!

Can the company keep making investors happy, or might things start to get a bit dicey after all those gains? We’ll find out when the company reports its fiscal 2014 second-quarter results tomorrow, after the market closes.

Workday operates a cloud platform for enterprise resource planning, helping companies manage core functions like payroll, HR and financials. For the most part, it targets mega players like Oracle (ORCL) and SAP (SAP). But with a focus on the cloud, Workday has some big advantages.

For example, the technology tends to be cheaper, allows for real-time access of data and analytics and also has seamless integration with mobile devices. Workday’s roster of clients include well-known operators, such as AIG (AIG), Four Seasons Hotels, Kimberly Clark (KMB) and Lenovo (LNVGY).

The company also has another benefit: the management team. Co-CEOs Aneel Bhusri and David Duffield are innovators in the ERP market, having built PeopleSoft.

As for Q2, it should be no surprise that analysts are upbeat. The revenue projection is for $100.5 million, up 60% on a YOY basis. And while net income is expected to be a loss of 18 cents per share, keep in mind that Workday is investing heavily in its infrastructure.

It’s true that the company has been rock-solid on beating estimates. But investors should still be wary. For the most part, ERP systems are far from cheap, and it’s easy for potential customers to put off the purchase decision. As seen with the earnings of other mega tech companies, such as IBM (IBM) and Oracle (ORCL), there appears to be some skittishness from customers with high-ticket items.

In other words, if Workday experiences some of this blowback, there could easily be a slowdown on the revenue ramp, which would put the stock in jeopardy.

Besides, the valuation of Workday is already assuming super-strong growth. The price-to-sales ratio is a whopping 42X! Even in the cloud world, where valuations can be extreme, this is at the outer limits.

So unless you have a strong stomach for risk, it could be fairly dicey playing Workday’s earnings.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll 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.

Article printed from InvestorPlace Media,

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