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Workday’s hugely successful IPO seems beyond reason

This week's tech-sector troubles did what no other force of markets and nature could do previously – stop the ever-higher climb of the shares of Workday Inc.

The California provider of "cloud"-based business applications went public Oct. 12 at $28 (U.S.), above its planned $24 to $26 price range. That range had been jacked up earlier in the week from the previous $21 to $24.

Investors trampled in, driving the shares to $48.69 their first day of trading. And the gains continued, as the shares closed at $51.94 on Monday, $52.16 Tuesday and $55.41 Wednesday. Thursday's close of $53.46, a 3.5 per cent drop, was its first daily decline as a public company.

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It's trading flat so far today, down just 17 cents, or 0.3 per cent, at $53.25.

Is the pause a buying opportunity? Only if you're a really, really big believer in the power of "cloud" computing, where outside companies own the servers, storage and applications.

Workday's market capitalization remains above $8.5-billion. For this, you get just under $200-million in annual sales, a $90-million net loss in the last 12 months, and negative EBITDA, or earnings before interest, taxes, depreciation and amortization, of almost $76-million.

No earnings-based metrics apply; it trades at about 45 times annual revenue. It's the only company in the U.S. on a major exchange that's worth at least $8-billion and trades above 40 times trailing revenue.

Now, to be fair, the company has an outstanding pedigree, and tech watchers have been anticipating this IPO for some time. Founders Aneel Bhusri and Dave Duffield led human resource software company PeopleSoft, sold to Oracle in 2004. The two launched Workday about a year later, embracing "the cloud" long before others.

The article "Why Workday has Oracle and SAP worried" from Fortune magazine last March, gives a good summary of this, although the revenue-growth numbers in the article now seem completely wrong, given what the company has filed.

Regardless of the company's prospects, however, investors may have bid it up beyond reason.

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Nigam Arora, an investment newsletter author who blogs for Marketwatch.com, says "even at $28, Workday was an expensive stock." While he advised clients to buy IPO shares and flip them the first day, he feels "at $55.41 (Wednesday's close), the valuation is insane."

By including issued but unused stock options in the share count, something a conventional market capitalization does not, Mr. Arora says Workday is valued at roughly $10-billion – or five times more expensive than cloud leader salesforce.com on a price-to-sales basis.

Meanwhile, Stephen Rosenman, an investor/blogger on the Seeking Alpha site, notes that while Workday's revenue grew 118 per cent, year-over-year, in the first six months of 2012, its growth figures for 2010 and 2009 were 170 per cent and 294 per cent, respectively.

"Sorry, guys, but wild valuations call for wild sales acceleration and Workday's best days might be behind it," Mr. Rosenman wrote. "Following the trend, it wouldn't be surprising to see Workday's revenue growth slow next year to a 60 to 70 per cent rate. Not bad, but not worth the staggering valuation."

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About the Author
Business and investing reporter and columnist

A business journalist since 1994, David Milstead began writing for The Globe and Mail in 2009. During eight years at the Rocky Mountain News in Denver, Colo., he individually or jointly won nine national awards from SABEW, the Society of American Business Editors and Writers. He has also worked at the Wall Street Journal. More

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