Will Workday Keep Working for Investors?

The company is slated to report Q4 numbers after the bell today

   

One of last year’s top IPOs was Workday (NYSE:WDAY), which came public at $28 in October. Shares jumped 73% on the first day and are now trading for over $64.

Workday is a cloud-based operator that focuses on enterprise resource management (ERP). Essentially, this involves helping companies manage critical functions like HR, payroll, financials and procurement.

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After the bell today, the company will report its fourth-quarter numbers … and Wall Street has high expectations. The forecast is for an 81% increase in revenues to $78.2 million. Still, many analysts also think the losses will continue. For Q4, the forecast adjusted loss is for 21 cents a share — up from a loss of 18 cents a share in the same period a year ago.

Over the past couple years, I’ve had a chance to talk to Workday’s co-founder and co-CEO Aneel Bhusri several times. He’s definitely impressive and has a strong background in the ERP space. Before starting Workday in 2005, he was a senior vice president at PeopleSoft — the pioneering company in ERP — while Aneel’s partner, Dave Duffield, was the founder of PeopleSoft.

Both men realized that the cloud would be the way to break the hammerlock that SAP (NYSE:SAP) and Oracle (NASDAQ:ORCL) have had on the ERP market.Just some of the advantages of the technology include: lower costs since there is no need to purchase servers or expensive hardware; seamless upgrades since updates are done online; more intuitive interfaces; and improved analytics because the data is centralized. Workday has also been an innovator with mobile devices, which has been crucial because — let’s face it — smartphones and tablets have become ubiquitous in the workplace.

Another key for Workday’s success has been its focus on large customers, which include operators like Aviva International (PINK:AIVAF), AIG (NYSE:AIG), Four Seasons HotelsKimberly-Clark (NYSE:KMB) and Lenovo (PINK:LNVGY). In fact, the largest deployment covers a global workforce of over 200,000. For the most part, these types of customers often keep an ERP solution for multiple years since it is usually too disruptive to rip-out an existing solution. This means that Workday’s customer base is likely to be a durable revenue source for the long-haul.

Of course, that is also part of the reason the company has a nose-bleed valuation; shares are trading at an enterprise-value-to-sales ratio of 37! In other words, Wall Street seems to be expecting the growth to last for quite a while. The trouble, though, is that growth can be a bit lumpy the enterprise software world. If just a handful of potential customers delay orders, the impact can be substantial … and this kind of thing is pretty normal in this environment.

Plus, there are already some signs that IT spending is getting tighter — at least in the short-term. Just look at VMware (NYSE:VMW), which posted a horrible Q4. The company noted that customers — especially the federal government and businesses in Europe — were delaying purchases.

And it looks like it was not a one-off. Other companies like BMC (NYSE:BMC) have also experienced a slowdown. Purchasing expensive software is always discretionary, especially when the macro-economy is sluggish and the prospects are uncertain.  This is the case even if the technology is top-notch.

In light of all this — and the aforementioned valuation — it’s a good idea to play things safe with Workday. With expectations so high, there could easily be a miss.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of “How to Create the Next Facebook” and “High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders.”Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.


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