The provider of enterprise cloud-based applications for customers to manage critical business functions trades at around 25 times fiscal year 2014 (ending January 2014) revenue targets. As previously mentioned, the stock trades at an extreme valuation even compared to the other hot IPOs of 2012. It even trades outlandishly compared to industry leader salesforce.com, inc. (NYSE:CRM) and makes ServiceNow Inc (NYSE:NOW) trading at 12 times revenue estimates look as cheap.
The company just reported Q413 results so what is it that makes investors pay such multiples for the stock?
Q413 highlights
The company reported an incredible 105% growth in subscription revenue in the quarter. The problem is that $60 million of quarterly subscription revenue hardly justifies an $11 billion market cap. Workday Inc (NYSE:WDAY) is still losing money and free cash flow (FCF) is negative.
The other highlights were as follows:
Total revenue for the fourth quarter were $81.5 million, an increase of 89% from the fourth quarter of 2012. Subscription revenue was $59.6 million, an increase of 105% from same period last year.
Non-GAAP operating loss for the fourth quarter was $25.2 million, compared to a non-GAAP operating loss of $21.7 million last year.1
The fourth quarter non-GAAP net loss per basic and diluted share was $0.16, compared to a non-GAAP net loss per basic and diluted share of $0.73 during the same period last year.
Operating cash flow was $5.9 million in the fourth quarter. Free cash flow was a negative $4.0 million in the fourth quarter.
While the operating cash flow was a positive $6 million, the company continues to lose a significant amount of money even on a non-GAAP basis. One good sign is that the company has $695 million in total unearned subscription revenue plus subscription backlog. Amazingly the CFO stated in the earnings call that the operating loss of $25 million was much better than expected.
Guidance
The company guided to basically inline with analysts estimates of revenue in the $430 million range for FY14. Growth rates of 55% just don’t justify a market cap that exceeds $11 billion. At least the company guided to over 75% growth in subscription revenue. The stock is worth nearly half the value of salesforce.com, inc. (NYSE:CRM) that has revenue of nearly $4 billion or almost 10 times that of Workday Inc (NYSE:WDAY).
The guidance for a negative operating margin of 30% in fiscal 2014 should give most investors a major reason to pause.
Subscription revenue
The market continues to value subscription based stocks at extreme valuations. Accounting standards require reporting the subscription revenue over the period of the contract; even though, the company might collect all the cash up front while incurring considerable sales and marketing costs as well.
In the case of Workday Inc (NYSE:WDAY), it still reported negative FCF of $4 million in Q4. If the company can’t even report positive FCF, investors should question the $11 billion market cap. Even non-GAAP numbers had the company losing $25 million compared to $22 million last year. For the fiscal year, the company had an operating loss of $118 million, an incredible amount for such a speculative stock.
Total unearned revenue and subscription backlog was nearly $700 million at the end of the quarter suggesting the company trades at 15 times the subscription backlog in support of the high valuation. Even with $790 million in cash and cash equivalents, the company would only have a market value of around $1.2 billion if the company shut down and the backlog was converted to cash.
The fallacy of the subscription revenue models is that the market places huge multiples on contracts that might not even be profitable. In the case of Workday, the company might have a substantial contract base averaging three years, but for now it isn’t able to even generate positive FCF.
IPO unlock
As highlighted in the previous article, the other hot IPOs of 2012 have struggled to produce gains for investors. Workday remains by far the most expensive stock in that group. A stock such as Millennial Media, Inc. (NYSE:MM) forecast similar growth yet trades at a substantial discount to where Workday Inc (NYSE:WDAY) trades now. The largest independent mobile advertising exchange expects revenue growth to exceed 50% this year while only trading for less than 2 times that revenue. Surprisingly the market expects the company to be profitable as well, yet it hasn’t helped the valuation.
Speaking of the IPO, Workday Inc (NYSE:WDAY) has an IPO unlock coming up in April that will flood the market with 63 million shares and exercisable options. The company only has 162 million shares outstanding and this unlock will add 14 million exercisable stock options not included in that share count.
Comparative performance
The below table highlights the comparative revenue multiples of Workday with salesforce.com, inc. (NYSE:CRM) and ServiceNow Inc (NYSE:NOW):
Most investors consider the other two companies extremely expensive, yet Workday is off the chart with multiples double the others.
Conclusion
Investors need to be warned again that these high profile IPOs provide limited upside in the after market. The drop by Millennial Media after a successful IPO highlights the risks of a high priced stock.
Workday Inc (NYSE:WDAY) has the most expensive multiple of those high flier IPOs and the comparable business software stocks. When an investor buys this stock, do they really expect it to rise to 30 times revenue multiples? The stock provides limited upside and in fact investors might consider shorting it if the market peaks out.
The article Workday Is Worth How Much? originally appeared on Fool.com and is written by Mark Holder.
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