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Workday Inc (WDAY): An Intriguing Move by This Company Would Not Help the Stock

I think that Workday is too big to be a target. The company has a market capitalization of $10.6 billion. As you can see from the deals mentioned above, a typical cloud-related purchase goes for $2 billion-$3 billion. Cornerstone OnDemand fits better into the target category. While the stock is trading at a 1344 forward P/E, investors must anticipate that the company would become an acquisition target. Otherwise, I do not see how Cornerstone lives up to its valuation.

Key players – SAP and Oracle – have already made their purchases. Would they be buying more? Only as an act of defense. Both companies have solutions they can offer to their customers, so there is no reason to duplicate them. Both stocks are underperforming this year. Oracle Corporation (NASDAQ:ORCL) is up 1%, while SAP AG (ADR) (NYSE:SAP) is down 4%.

Bottom Line

Workday Inc (NYSE:WDAY) is eager to spend money, but is it up to making money? The company would have to find a way to become profitable after the initial growth phase. I do not think that investors could hope that some giant would come and offer a 50% premium for the stock, because it would mean paying more than $15 billion.

Workday trades at 34.6 price-to-sales, while Cornerstone trades at 15.5 price-to-sales. Given that the capitalization of Workday is five times more than Cornerstone’s, the company has to grow fast or the stock would tank. All in all, I think that Workday is overvalued and presents significant downside risks for investors.

Vladimir Zernov has no position in any stocks mentioned. The Motley Fool owns shares of Oracle. Vladimir is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article An Intriguing Move by This Company Would Not Help the Stock originally appeared on Fool.com and is written by Vladimir Zernov.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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