A 13G filed with the SEC has reported that Lone Pine Capital, which is managed by billionaire and Tiger Cub Stephen Mandel, owns 3.5 million shares of Workday Inc (NYSE:WDAY), a $9.7 billion market cap enterprise software company. This gives Lone Pine over 9% of the total shares outstanding. We track quarterly 13F filings from hedge funds such as Lone Pine as part of our work developing investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year) and so we can see that as of the end of December the fund owned about 980,000 shares. See more of Mandel’s stock picks.
Workday Inc (NYSE:WDAY) went public in October 2012, and is currently up 19% from its levels shortly after the IPO. The company’s fiscal year ended in January 2013, with revenue more than doubling compared to the previous fiscal year. Technically, margins did improve, but Workday was still left with a 50% increase in operating losses. This was partly due to a large percentage increase in R&D (some analysts argue that research and development should be thought of as an investment, particularly with software and other technology companies, rather than purely as an expense), though in income statement terms it’s tough to see much progress. Workday Inc (NYSE:WDAY) did manage slightly positive cash flow from operations for the year, but this was actually less than what it used on capex. We’d note that investment needs are low compared to the cash raised in the IPO (which was mostly invested in marketable securities).
Fellow Tiger Cub John Griffin’s Blue Ridge Capital was the largest shareholder in Workday at the end of 2012 out of the filers we track in our database, with a position of 1.8 million shares (find Griffin’s favorite stocks). Tiger Global Management was another major shareholder, disclosing ownership of 525,000 shares in its own 13F (check out more stocks Tiger Global likes). “Tiger Cub” funds such as these three are so named because they were founded by former employees of billionaire and legendary investor Julian Robertson’s Tiger Management.
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.
