Workday Inc (NYSE:WDAY) (NYSE:WDAY), a company that provides cloud-based applications for enterprises, has recently reported its quarterly earnings. The company has reported a net loss of $0.15 per share, while analysts were expecting a loss of $0.18 per share. Total quarterly revenue was $91.6 million, up 61% year-over-year. The stock is up 37% since the day it began to trade on the NYSE. Stocks that rise, despite posting losses, always gain my attention. If such companies provide the anticipated growth and finally report profits, their shares could skyrocket, like what happened with Tesla Motors Inc (NASDAQ:TSLA). If they are unable to produce positive results, their shares would tank. Which fate is around the corner for Workday Inc (NYSE:WDAY)?
Selling the growth
Workday expects total revenue for the year to be in the range of $425 million-$440 million, scoring growth of 55%-61%. Operating margin is expected to be between negative 25% and negative 30%. Analysts are expecting the company to lose $0.71 per share in the current fiscal year, and $0.69 per share in the next fiscal year. While the revenue was growing, costs were growing too. Total costs and expenses rose 62% year-over-year. If this trend continues, the rise of the revenue would be eaten by the rise of the costs, and the company would continue to post losses.
Workday Inc (NYSE:WDAY) concentrates on growth and new customer acquisition. The company states that it believes that once it wins a customer, it keeps the customer for years beyond the initial subscription period. Workday focuses on selling three-year terms on contracts because it thinks it would have very high renewal rates. This is a reasonable assumption, given the fact that it takes a lot of time and effort to implement financial management and human resource management systems. It is unclear when the company expects to become profitable. At one point, the revenue growth would have to exceed growth cost, or the stock would plummet.
Competition
Workday Inc (NYSE:WDAY) competes with established companies like SAP AG (NYSE:SAP) and Oracle Corporation (NASDAQ:ORCL). SAP and Oracle have both financial management and human resource management products. The problem for Workday is that transition from one product to another is a huge undertaking. There are more chances that a company would continue to use the system that it already had than it would switch to another one. The drawback of being a big company is that it takes a lot of money to lift your stock. Oracle Corporation (NASDAQ:ORCL) is up only 3% year-to-date, while SAP AG (NYSE:SAP) is down 4%. Oracle pays 0.7% dividend, SAP pays 1.04% dividend. As a growth company, Workday does not pay dividends and would not pay them in the foreseeable future.
Do Oracle Corporation (NASDAQ:ORCL) and SAP feel the presence of Workday Inc (NYSE:WDAY)? Not yet. Oracle products are extremely diversified and well received by the market. In fact, Oracle even provides database and IT infrastructure for SAP AG (NYSE:SAP). SAP positions in Europe are very strong. Given the fact that Europe has no growth at all, it would be difficult for Workday to win customers from Europe because IT budgets are tight. While the growth is muted all over the world, Oracle Corporation (NASDAQ:ORCL) and SAP AG (NYSE:SAP) feel this too. This is why their stocks are underperforming the S&P 500. For non-IT companies, IT budget is just costs, and the war on costs happens to be across all industries.
One thing that worries me the most and should worry you, too
When a company is losing money on a constant basis, it’s necessary to search for additional funds. The main ways to do this are to issue bonds or stock. When analyzing companies that are fresh from IPO, it is important to observe the number of authorized stock shares. This is the number of shares that could potentially be issued. Workday Inc (NYSE:WDAY) has 166.58 million shares outstanding. The company has authorized the issue of one billion shares. This does not mean that those shares would be issued. It means they could be issued if necessary. Additional share issue leads to the dilution of shares held by existing shareholders, and it hurts the stock price.
Bottom line
I would not recommend Workday for long-term investing. The company has powerful competitors. Workday is not expected to post profits in the next two years. A huge number of shares is authorized for issue and your share could be diluted each time the company needs additional money. The shares are rising on optimism about the growth. If the company missed growth estimates on the next earnings report, it would have dramatic consequences for the stock price. I would like to see clearer profitability plans from the management before putting my money in Workday Inc (NYSE:WDAY).
Vladimir Zernov has no position in any stocks mentioned. The Motley Fool owns shares of Oracle Corporation (NASDAQ:ORCL).
The article Does Growth Justify Workday’s Price? originally appeared on Fool.com.
Vladimir is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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