Does Growth Justify Workday Inc (WDAY)’s Price?

Do Oracle Corporation (NASDAQ:ORCL) and SAP feel the presence of Workday Inc (NYSE:WDAY)? Not yet. Oracle products are extremely diversified and well received by the market. In fact, Oracle even provides database and IT infrastructure for SAP AG (NYSE:SAP). SAP positions in Europe are very strong. Given the fact that Europe has no growth at all, it would be difficult for Workday to win customers from Europe because IT budgets are tight. While the growth is muted all over the world, Oracle Corporation (NASDAQ:ORCL) and SAP AG (NYSE:SAP) feel this too. This is why their stocks are underperforming the S&P 500. For non-IT companies, IT budget is just costs, and the war on costs happens to be across all industries.

One thing that worries me the most and should worry you, too

When a company is losing money on a constant basis, it’s necessary to search for additional funds. The main ways to do this are to issue bonds or stock. When analyzing companies that are fresh from IPO, it is important to observe the number of authorized stock shares. This is the number of shares that could potentially be issued. Workday Inc (NYSE:WDAY) has 166.58 million shares outstanding. The company has authorized the issue of one billion shares. This does not mean that those shares would be issued. It means they could be issued if necessary. Additional share issue leads to the dilution of shares held by existing shareholders, and it hurts the stock price.

Bottom line

I would not recommend Workday for long-term investing. The company has powerful competitors. Workday is not expected to post profits in the next two years. A huge number of shares is authorized for issue and your share could be diluted each time the company needs additional money. The shares are rising on optimism about the growth. If the company missed growth estimates on the next earnings report, it would have dramatic consequences for the stock price. I would like to see clearer profitability plans from the management before putting my money in Workday Inc (NYSE:WDAY).

The article Does Growth Justify Workday’s Price? originally appeared on Fool.com.

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

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