Is Workday Worth $10.22 Billion?

According to a Forrester Research report, the software-as-a-service (SaaS) market will grow 25% annually to $59 billion this year. The market is expected to be worth $75 billion by 2014. The market opportunity is helping to drive recently listed Workday’s (NYSE:WDAY) stock upward. Despite the high growth in revenues, some analysts believe that the company’s continuously loss-making operations don’t justify their huge valuation. Let’s look at the numbers.

Workday’s Financials
Workday saw Q4 revenues grow 89% over the year to $81.5 million driven by 105% growth in subscription revenues to $59.6 million. Services revenues grew 55% over the year to $21.9 million. They reported a net loss of $0.16 per share compared with a loss of $0.73 per share reported a year ago. The market was looking for revenues of $78 million and a loss of $0.21 per share. Workday continues to report negative free cash flows causing concern to analysts tracking the stock.

They ended the year with revenues more than doubling from previous year’s $134 million to $274 million. Net loss fell from $2.57 per share a year ago to $1.26 per share for the year.

They expect to end the current quarter with revenues of $83 million-$87 million and the fiscal year’s revenues of $420 million-$425 million.

Workday’s Expanding Portfolio
Workday has been investing in product development to capture a bigger market share. During the last quarter, they released two plans for two new applications, Workday Big Data and Workday Recruiting. Workday Big Data application is a pre-packaged analytics tool that will enable their customers to combine Workday data with any third-party data including data streams like LinkedIn, Facebook, and Twitter, all delivered in the cloud. Through the tool, the human resource and finance teams of their business customers will be able to make more informed decisions by looking at pre-packaged analytics and a simplified spreadsheet-like interface that will empower them to change data sources and modify calculations. The tool will also offer a unified platform to provide a single user experience across multiple devices including tablets, smartphones, and computers. Big data application will be available to their customers by the second half of the current year.

As part of the development of the Recruiting application, Workday will work with customers and strategic design partners across industries to address the recruiting challenges faced by their customers. The tool will include features such as a unified human capital management (HCM) tool that will streamline talent acquisition process and provide full visibility from planning to sourcing, selection, and onboarding. It will be suited for mobile devices and will feature collaborative tools to enable the hiring team to share, follow, and provide feedback on candidates.

The market is pleased with Workday’s expanding product range. Their stock is trading at $61.59 with a market capitalization of $10.22 billion. It touched a 52-week high of $65.00 earlier last month. The stock is trading significantly higher than the $28 it listed at in October 2012. But I have my concerns about the stock’s high valuation. Besides continuing losses, the company’s stock lock-in period is about to expire as well. During this month, Workday will release 63 million more shares in the market, which will surely result in a sell-off.

As you know, I love the SaaS business model, and am generally bullish on the category. However, Workday seems to have gotten a bit ahead of itself.