Why Human Resources is Probably Your Best Bet in The Clouds

Subhadeep is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Cloud-based human resources software maker Workday (NYSE: WDAY) has probably never had it so good. Intelligent share pricing, smart marketing strategies, and steady growth potential have prompted the market to catapult the company’s stock price. And now that the initial euphoria has probably settled down a bit, lets delve into the real reasons as to why people are so gung-ho about a company that has posted net losses consistently and also warned of further losses in the near future.

Well, for a start, let’s find out what makes Workday truly stand out from other cloud-based enterprise software providers, and why it’s turning out to be a potential big-time threat to larger companies such as Oracle (NYSE: ORCL) and SAP (NYSE: SAP), as it grabs key customers such as Lenovo, Kimberley-Clark, and Flextronics from the big two. Workday basically develops online software that takes care of functions related to human resources, including payroll, finance, and time management. But at the same time, it is fast expanding its suite of services, in its efforts to cater to a wider range of customers, even as its software becomes widely accessible from multiple devices including laptops, tablets, and smartphones. These customers are from industries as diverse as health care, technology, retail and financial services, and more importantly, they are a mix of small, medium, and big companies. That’s eliminating too much dependence on a few customers, which is always a good sign for any company. That’s point number one.

Secondly, the fact that Workday’s software sales are based on a subscription-based model provide it with much greater control over analyzing short-term revenue growth, and also offer potential investors a glimpse of future growth. Just knowing the fact that the company derives a monthly or annual payment from customers who have signed a deal with it for a specified time period is attractive to potential investors as a way of ensuring recurring revenue, as Menlo Ventures MD John Jarve very correctly pointed out recently.  

Point number three centers on the way the company has been targeting big customers of SAP and Oracle right at the time when these customers wish to upgrade the versions of their existing vendor (read SAP/Oracle) software. Workday smartly offers them the same services for about a fraction of the actual cost, making the advantages of a switchover most obvious.  

It’s not that Oracle and SAP haven’t been doing their bit to grab a larger share of a market that has been valued at around a mind-boggling $9.5 billion, as calculated by Forrester Research. The two companies have embarked on a recent string of acquisitions in the human resources software sector. Some of the notable recent ones include SAP’s buyout of SuccessFactors for a whopping $3.4 billion in cash late last year and Oracle’s acquisition of TaleoCorp for approximately $1.9 billion towards the beginning of this year. But then, these companies obviously need time to fully absorb the huge costs of these acquisitions, giving more time for take-off to newbies like Workday.     

Workday certainly looks good. This is one company that has zero debt, and is growing at more than 100 percent on an annual basis. While losses are and will be there for some more time, the good thing is that components such as R&D and G&A as a percentage of revenue are steadily declining. At the same time, this is a company I would probably watch from a distance and see where its actually heading for, in short, to know how long the euphoria will really last. Fool on!


subhadeeptech has no positions in the stocks mentioned above. The Motley Fool owns shares of Oracle. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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