Tiger Cub John Griffin Likes This Recent IPO

BLUE RIDGE CAPITALWorkday Inc (NYSE:WDAY) went public in mid-October at a price of $28 per share and popped 75% on its first day of trading. At its current level of about $50, the stock is up nearly 80% from the IPO price bringing it to a market capitalization of $8 billion. Blue Ridge Capital was one of the actors driving up the price: by October 18th, the hedge fund had purchased a total of 1.8 million shares of the company, giving it nearly 7% of the shares outstanding. Blue Ridge is managed by John Griffin, who had been Julian Robertson’s second in command at Tiger Management. Like many Tiger Cubs, Griffin tends to like technology stocks, as we can see from Blue Ridge’s 13F filing from the end of June. See Blue Ridge’s top stock picks.

Workday is a cloud computing company whose products include a number of applications that help businesses manage human resources, expenses, and finances. Its S-1 filing included financial data for the first half of the company’s current fiscal year; this period ended in July. Revenue for these six months was more than double what it was in the same period in the last fiscal year. Costs were up, and while the company saw its net losses increase from $36 million to $47 million the net margin improved. In fact, the quantity “net losses plus research and development expenses” which can sometimes be relevant for a technology company, nearly broke even. There does appear to be a positive trajectory here, but it’s difficult for us to recommend a company which isn’t making profits. In addition, Wall Street analysts predict continued losses for the rest of the current fiscal year.

We would compare Workday to other business services software companies such as payroll and HR company Automatic Data Processing (NASDAQ:ADP), IT services provider SAP AG (NYSE:SAP), database software company Oracle Corporation (NASDAQ:ORCL), and salesforce.com, inc. (NYSE:CRM), which allows companies to manage their sales programs. Of these companies, ADP and SAP look most similar in terms of their pricing. Their trailing P/E multiples are between 21 and 23, and their forward P/Es are between 18 and 20. Each of these companies reported revenue growth in their last quarter compared to the same period in 2011, with SAP’s coming in at 16%. However, that company’s earnings were cut nearly in half over the same time frame. As a result, we would think that ADP is the better of the two companies- it seems to have steadier financials and trades at similar multiples to its earnings.

salesforce.com is expected to earn $1.51 per share in the current fiscal year, which ends in January 2013. However, the company’s high stock price therefore places its valuation at nearly 100 times the current P/E multiple. Even the growth expectations from Wall Street analysts give it a forward P/E of 74. salesforce.com is growing its revenues at a moderately high rate, but we would still avoid the stock for now. The other companies we’ve discussed look to be better values. Oracle looks even better. Its revenue was down slightly in the company’s first fiscal quarter (which ended in August) than a year earlier, but net income was up by 11%. Despite these decent results, Oracle carries trailing and forward P/Es of 15 and 11, respectively. As a result, we’d recommend it as a value stock. Read our analysis of Oracle’s business.

We like to be able to identify the value opportunity in a stock, and so we wouldn’t recommend following Blue Ridge’s lead in Workday. Oracle is in Workday’s peer group and seems to be a good buy with low earnings multiples and the indication that it should at least be able to keep its business steady in the next few quarters.

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