Workday (WDAY), which operates a cloud platform for enterprise resource planning (ERP), had one of last year’s top IPOs. In October, the company issued shares at $28. As of now, the stock price is at $68.
That’s a huge run-up, so it poses a pretty obvious question: Can WDAY keep it up?
We’ll get a clue today when the company reports its first-quarter results. Unsurprisingly, the bar is fairly high. The Wall Street consensus is for revenue of $87 million and a net loss of 18 cents a share, compared to revenue of $43 million and a loss of 24 cents a share in the same period a year ago.
Yes, that’s an expected 88% growth in sales, along with a loss that one-third smaller.
As of now, a big advantage for WDAY is that it has few competitors. The main reason is that ERP software is extremely difficult to build. After all, it helps companies deal with mission critical functions like payroll, financial management and human capital management. In fact, WDAY’s main competitors include Oracle (ORCL) and SAP (SAP), which mostly rely on legacy technologies.
Workday’s focus on the cloud is a game-changer, though, as the technology essentially allows for the use of data analytics in real-time, seamless upgrades and easier integration with global operations.
Plus, Workday is more than just a cloud operator. It has invested heavily in research and development, including pushes towards mobile and Big Data. In fact, the company launches about three new versions of its software per year!
Another thing in its corner: Workday’s top-notch leadership team. Co-CEOs Aneel Bhusri and David Duffield are innovators of the ERP market, having built PeopleSoft. So it should be no surprise that at Workday they have been able to build a base of over 400 customers, which include biggies like AIG (AIG), Four Seasons Hotels, Kimberly Clark (KMB) and Lenovo (LNVGY).
All this sounds great, right?
Of course it does … but investor still need to be cautious.
ERP is a big commitment for customers. An installation can take a year or more, as well as involve lots of disruption to an organization. Plus, it can also cost millions of dollars in consulting fees. In fact, 30% of WDAY’s revenues are from professional fees.
And in light of the slow U.S. economy, CEOs may be more inclined to wait before making a large software purchase. The general uncertainty has already hit other major companies like VMware (VMW) and Oracle this year.
Besides, the stock price is already considering Workday’s hyper-growth. Consider that WDAY trades at a nose-bleed 42 times revenues (and isn’t making money). It’s also not clear when the company will reach profitability.
In other words, for investors it’s probably not a good idea to roll the dice on WDAY’s earnings report.
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.