Workday Inc (NYSE:WDAY)’s peers include other enterprise software companies Automatic Data Processing (NASDAQ:ADP), Paychex, Inc. (NASDAQ:PAYX), Oracle Corporation (NASDAQ:ORCL), and SAP AG (ADR) (NYSE:SAP). All of these companies are profitable on a trailing basis, though with the exception of Oracle Corporation (NASDAQ:ORCL) they have something of a premium valuation with trailing P/Es in the 23-24 range. Oracle Corporation (NASDAQ:ORCL)- which trades at 15 times trailing earnings- has not been doing too well recently, with revenue and net income changing by less than 1% in its most recent quarter compared to the same period in the previous fiscal year. Automatic Data Processing (NASDAQ:ADP) and Paychex, Inc. (NASDAQ:PAYX) have been growing more moderately, but we don’t find the match between their performance and their valuation to be that good- neither company is currently managing over 8% growth in either sales or net income- so we would avoid those stock. SAP AG (ADR) (NYSE:SAP) managed 17% earnings growth in the first quarter of 2013 versus a year earlier, but revenue improvements were lower. Over time, increases in net margins should be unsustainable and so given the pricing it doesn’t look like a good value either.
An initial look at Workday Inc (NYSE:WDAY) and its peers suggests that the market is assigning quite high multiples to earnings (or, in the case of Workday, a high valuation for an unprofitable company). We suppose it’s possible that Workday Inc (NYSE:WDAY) could be acquired but that would be a very ambitious move by a larger software company and not something we’d want to depend on. As a result, we’d recommend against imitating this move by Lone Pine and would say that enterprise software in general does not look like an attractive industry at this time.
Disclosure: I own no shares of any stocks mentioned in this article.