Workday is off to a spectacular public market debut. After coming public Friday at $28 a share, the provider of cloud-based HR software rallied 74% on the first day of trading - and today is up another 8%. The stock lately is trading at $52.67, up another $3.98.
What's so astonishing here is the valuation that the market is placing on the shares. There were 22.75 million shares sold in the offering. After the offering, the company will have about 160.3 million shares out, not counting a 3.4 million share over-allotment option, which clearly seems likely to be exercised. The prospectus also notes that there are variety of options outstanding with deep in the money strike prices, including 30.5 million shares with a strike of $2.17. 1.1 million with a strike of $9.26 and 1.35 million with a strike of $7.33, plus 500,000 shares issued to fund the Workday Foundation. Add it all up, and you get a fully diluted 197 million shares and change, which implies a market cap a little over $10 billion.
Again, let me say, holy crap.
In the January 2012 fiscal year, Workday had revenue of $134.4 million. In the six months through July, revenues were $119.5 million, up a whopping 118% from the same period last year. So, OK, this is a fast growing company. But let's assume that revenues for the full year continue to grow rapidly in the second half. Heck, let's assume they accelerate, and January 2013 fiscal year revenues reach $300 million. That would give the company a valuation of 33x forward revenues. Not earnings. Revenues. You could do a P/E ratio instead, if only they had any earnings.
Let's compare the valuation for Workday to shares to Salesforce.com, another cloud-based software company that tends to be optimistically valued. Salesforce trades for 7x expected revenues for its January 2013 fiscal year. Let's assume you think that CRM is reasonably valued ( a view some would take issue with, but nevermind). Is a dollar of revenue from Workday really worth close to 5x a dollar of revenue from Salesforce.com?
Keep in mind two other factors:
- At some point soon, the underwriters on the deal are going to issue research reports on the company. And when they do, they are going to be hard pressed to make the case that the stock deserves to trade even higher still. Should any of the underwriters come out with lukewarm reports, the stock is going to come under some selling pressure.
- Also keep in mind that all of the company's insider shares are going to be unlocked about six months from now, creating the potential for a flood of profit-taking by employees and private round investors.
It sure is exciting to see an enterprise software company break-out in the public market after the debacle that was the Facebook IPO, but it seems to be that Workday's stock is reaching a level where it is going to run out of oxygen.
