To talk to the customers of Workday Inc. – and to look at the sky-high valuation of its stock – one might reasonably conclude the end is near for its rival, legendary tech giant Oracle Corp.
Workday delivers human-resources and other business software-systems over the Internet (“the cloud”), as opposed to older rivals such as Oracle and SAP, which rely on the traditional sales of massive hardware and software combinations. In a recent analysis of Workday’s customer base, Robert W. Baird & Co. found 96 per cent would recommend the company to others.
“As one large corporate information-technology buyer, to paraphrase, said to us, ‘The jig’s up for Oracle. They jacked up prices when they thought they had no competition, and now they do, and we can’t wait to switch off their apps,’” said Canaccord Genuity analyst Richard Davis.
The result, seen in Workday’s financial results, have been dazzling. The company posted a year-over-year revenue gain in its most recent quarter of 74 per cent. It’s gone from $25-million in sales in 2009 to $469-million, albeit unprofitably. Still, investors expect more, as its market capitalization of $18-billion is more than 30 times revenue.
And yet, it may be too early to write Oracle’s obituary. Indeed, there’s a case to be made for both stocks, depending largely on whether an investor is seeking safe harbour in a potentially stormy economy or wants to go all-in on the idea that all computing is heading to the cloud.
“They’re two different stories,” says Brent Thill, an analyst at UBS Securities who has managed to place a “buy” rating on both. “One’s a value name and one’s a growth name, so they’re built for different investors. Oracle has some challenges, but they’ve always figured a way out of the problems they’re in. Workday is built from the ground up for the new world, and they’re doing phenomenally.”
Oracle alpha-male CEO Larry Ellison may bristle at the description of his stock as a “value name,” but it fits. Gone are the 20+ price-to-earnings multiples in place prior to the financial crisis. Now, the shares putter around the 11 or 12 mark. The company has posted 10 straight quarters of revenue growth below 5 per cent, and frequently missed analyst estimates on a variety of metrics, including its fiscal third-quarter earnings earlier this week.
Certainly, the company suffered from the deferral of big-ticket IT spending in the recent economic downturn. But a more secular shift has also occurred: The growth of cloud computing, where software and its associated data are stored remotely.
“Early on, Larry Ellison bashed the cloud; Now he’s done a 180 and embraced it,” says UBS’ Mr. Thill. The analyst is among the few people who believe that Oracle will ultimately execute, although he admits “they’re multiple quarters, if not years, away from really, truly getting their business aligned to where the new world of technology is.”
In the meantime, Oracle is paying a dividend that yields 1.2 per cent, is buying back shares, and generated $15-billion in operating cash flow in 2013 (more than twice as much, per month, as Workday booked in revenue all year.) Mr. Thill has a $42 target price, implying a small upside for shares that closed Friday at $37.50.
But, oh, that opportunity for Workday. Mr. Thill notes that SAP and Oracle, combined, have a market capitalization of $250-billion, and “all Workday needs is a little bit of share in a big market.” (Figuring something similar, cloud-based business-software Paylocity Holding Corp. went public this week, jumping more than 80 per cent in its debut.)
Workday’s founders are veterans of PeopleSoft, a human-resources solutions company Oracle absorbed a decade ago in a hostile takeover. There are plenty of Oracle customers who originally made the decision to buy a PeopleSoft system – and seem receptive to the idea of trying out the systems at Workday as a result.
“Look at who Workday is replacing – Oracle/PeopleSoft is the solution most often being replaced,” says Baird analyst Chaitanya Yaramada, which has a $110 target price and “outperform” rating on the shares, which closed Friday at $97.10. While Oracle has a cloud-based solution called Fusion, “if you’re really going to re-architect and put in all-new software and train your people, you might as well go to Workday, which is a much better solution and a better company to deal with, with better customer service.”
The Baird survey suggests only 6 per cent of Workday’s customers are in the Forbes Global 2000 list of the world’s biggest companies, and just 14 per cent are in the Fortune 500. Baird believes 25 per cent penetration of the Global 2000 for its human-resources product is possible, plus 18 per cent penetration for its financial-management software, which suggests annual revenue of $6-billion. (Oracle had just under $38-billion in sales last year.)
Analyst Scott Berg of Northland Securities in Minneapolis is firmly on board with projections for Workday’s HR software – he believes the company will ultimately have 20 to 25 per cent of the market – but he has doubts whether the company’s other products will be as successful, leading to a “market perform” rating and $95 target price. “I don’t believe they’ll be competitive enough on a large scale, but the valuation suggests they can capture a sizable amount of those markets. I don’t believe that, and I think [the stock] is overvalued.”
Since the end of 2012, Workday stock is up almost 80 per cent, versus Oracle’s market-trailing 14.7 per cent.
Unfortunately for the cautious investor, the case for Workday is speculation, albeit informed speculation. UBS’ Mr. Thill says the price can’t be justified by the fundamentals – but, “this year and last year, all everyone said is that Workday is expensive. Which has been a better stock? Workday has made you a lot more than Oracle.”
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