Demand for software companies that cater to business clients remains strong, but not enough workdays exist in a year to make Workday Inc (NYSE:WDAY) attractive at current market multiples. The company went public in mid-October at highly unappealing multiples that left limited upside ever since.
The provider of enterprise cloud-based applications for customers to manage critical business functions trades at around 25 times fiscal year 2014 (ending January 2014) revenue targets. As previously mentioned, the stock trades at an extreme valuation even compared to the other hot IPOs of 2012. It even trades outlandishly compared to industry leader salesforce.com, inc. (NYSE:CRM) and makes ServiceNow Inc (NYSE:NOW) trading at 12 times revenue estimates look as cheap.
The company just reported Q413 results so what is it that makes investors pay such multiples for the stock?
The company reported an incredible 105% growth in subscription revenue in the quarter. The problem is that $60 million of quarterly subscription revenue hardly justifies an $11 billion market cap. Workday Inc (NYSE:WDAY) is still losing money and free cash flow (FCF) is negative.
The other highlights were as follows:
Total revenue for the fourth quarter were $81.5 million, an increase of 89% from the fourth quarter of 2012. Subscription revenue was $59.6 million, an increase of 105% from same period last year.
Non-GAAP operating loss for the fourth quarter was $25.2 million, compared to a non-GAAP operating loss of $21.7 million last year.1
The fourth quarter non-GAAP net loss per basic and diluted share was $0.16, compared to a non-GAAP net loss per basic and diluted share of $0.73 during the same period last year.
Operating cash flow was $5.9 million in the fourth quarter. Free cash flow was a negative $4.0 million in the fourth quarter.
While the operating cash flow was a positive $6 million, the company continues to lose a significant amount of money even on a non-GAAP basis. One good sign is that the company has $695 million in total unearned subscription revenue plus subscription backlog. Amazingly the CFO stated in the earnings call that the operating loss of $25 million was much better than expected.
The company guided to basically inline with analysts estimates of revenue in the $430 million range for FY14. Growth rates of 55% just don’t justify a market cap that exceeds $11 billion. At least the company guided to over 75% growth in subscription revenue. The stock is worth nearly half the value of salesforce.com, inc. (NYSE:CRM) that has revenue of nearly $4 billion or almost 10 times that of Workday Inc (NYSE:WDAY).
The guidance for a negative operating margin of 30% in fiscal 2014 should give most investors a major reason to pause.
The market continues to value subscription based stocks at extreme valuations. Accounting standards require reporting the subscription revenue over the period of the contract; even though, the company might collect all the cash up front while incurring considerable sales and marketing costs as well.