Not Enough Workdays to Make This Stock Attractive

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Demand for software companies that cater to business clients remains strong, but not enough workdays exist in a year to make Workday (NYSE: WDAY) attractive at current market multiples. The company went public in mid-October at highly unappealing multiples that leave limited upside for the retail investor buying now.

The provider of enterprise cloud-based applications for customers to manage critical business functions trades at around 20x 2013 revenue targets. A few other stocks hitting the market in 2012 with similarly high valuations struggled building any momentum in the after market.

IPO Pricing

The company priced 22.8M shares at $28 on October 12th. The deal raised $637M and priced above the original $24 to $26 range. All of the big underwriters including Morgan Stanley, Goldman Sachs, and J.P. Morgan acted as joint bookrunners on the deal.

The stock closed its first trading day up 75% after opening up 72% at $48.05. The stock notched the 5th largest first day gain in 2012. The other four, big data provider Splunk (NASDAQ: SPLK), mobile ad platform Millennial Media (NYSE: MM), organic food maker Annie’s (NYSE: BNNY), and quick-turn prototype manufacturer Proto Labs (NYSE: PRLB), have not fared so well after the IPO.

Comparative Performance

The below table highlights exactly how the top 2012 IPO stocks performed after huge first day gains:

<table> <tbody> <tr> <td><strong>  Company </strong></td> <td> <p><strong>  Performance After First Day   <br /></strong></p> <strong>(%)</strong> <p><strong> </strong></p> </td> <td><strong>  Forward P/S   </strong></td> <td><strong> Forward P/E   </strong></td> </tr> <tr> <td>Workday</td> <td>             (11.9)</td> <td>     21.8</td> <td>       N/A</td> </tr> <tr> <td>Annie's</td> <td>               (8.4)</td> <td>       2.8</td> <td>      32.8</td> </tr> <tr> <td>Millennial Media       </td> <td>             (51.0)</td> <td>       3.3</td> <td>      87.0</td> </tr> <tr> <td>Proto Labs</td> <td>               29.9</td> <td>       6.0</td> <td>      29.7</td> </tr> <tr> <td>Splunk</td> <td>             (22.4)</td> <td>      10.9</td> <td>  2,898.0</td> </tr> </tbody> </table>

Note how only Proto Labs currently has positive gains if you bought these stocks on the close of the first trading day. In fact, Proto Labs would be virtually flat if the investor bought it after around a month of being public.

The table further highlights how Workday makes the other stocks appear as relatively strong valuations now. Splunk is richly valued at nearly 11x 2013 revenue estimates, but it now appears a relative bargain compared to Workday. If an investor wanted to wade into this high growth, high risk area, the stocks of Annie's and Proto Labs offer some value potential with the growth rates close to the earnings multiples.

Analysts on hold

Interestingly, analysts at Stifel Nicolaus and Credit Suisse have come out with Hold ratings on the stock, even noting the company has immense growth potential. Otherwise, the analysts know the stock is extremely overvalued, but most of them appear unwilling to initiate a Sell rating.

The Stifel analyst forecasts the stock will trade at 11x CY14 revenue forecasts of $671.4M. That multiple places the stock at 2.5x the peer group average, providing limited multiple expansion possibilities.

In general, analysts expect Workday to report a loss of $0.86 in the year ending January 2014. The forecast is for revenue to grow 57% to $424M and 50% growth over the next 5 years. Neither justifies a market cap of nearly $9.3B.


These high profile IPOs provide limited upside in the after market. The recent past suggests that any initial gains lead to negative returns as lock-ups occur, and valuations leave limited upside potential. These stocks are likely to languish for the next couple years with major downside potential if the company ever disappoints the market.

On top of that, Workday has the most expensive multiple of the high flier IPOs. If any money is made on this stock in the next few years, it won’t be on the long side.

Mark Holder and Stone Fox Capital Advisors, LLC have no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Proto Labs. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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