Workday Inc (NYSE:WDAY) is well-positioned for long-term growth with its multi-application strategy, and its unique and differentiated technology that help expanding addressable markets through new product introduction, and penetrate enterprise customers. However, it may have to counter the big fish in the form of Oracle Corporation (NYSE:ORCL) and SAP to sustain in the HCM market.
Workday is a leading provider of enterprise cloud applications for human resources and finance functions. Founded in 2005, Workday delivers human capital management (HCM), financial management, and analytics applications designed for the world's largest organizations.
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Further penetration of the HCM space along with adoption of Workday's Financial Management Suite should lead to long-term sustainable billings growth of more than 30 percent.
BMO Capital Markets analyst Joel Fishbein said Workday has a best-of-breed ERP solution, which is disrupting the market through its on-demand model, and object-oriented architecture that, over time, could pull the company deeper into the data analytics market.
The ERP market is by far the largest application software market, totaling $24.5 billion in 2012, and much of the growth is coming from SaaS, only 10 percent penetration, and augmenting and replacing on-premises applications.
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Workday has a best-of-breed ERP solution which is disrupting the market. Few software vendors have garnered as much attention as Workday has over the past several months. That's being driven by the company's rapid success in the human capital management (HCM) space, with subscription revenues growing well above 100 percent over the past several years.
When stacked up against the competition, Workday clearly has one of the best all-around HCM solutions, which delivered through the cloud, offers potential customers an excellent alternative to legacy on-premise solutions. Currently, Workday has more than 550 customers and believes its global customer opportunity is 23,000, implying 2.3 percent market penetration currently.
Fishbein noted that Workday should see continued strong customer additions for the next several years, based on the premise that there is a wave of pending upgrade cycles for many legacy ERP applications over the next few years.
That said, competition remains stringent, and the 'stickiness' of ERP applications should not be discounted. Over both the near and long term, Workday will be able to sustain above-average industry growth by driving further adoption of its core HCM, expanding Financials portfolio, and new analytics solution. Vertical experience in Educations and Government remain large opportunities.
ERP applications are sticky. Workday may have a hard time acquiring new customers. One of the biggest risks to Workday's success is the fact that ERP applications are typically exceeding entrenched, at least more so than customer relationship management (CRM), business intelligence, content management, and other less critical business applications.
Fishbein said that the incumbent market share leaders – SAP and Oracle – have a very strong hold on their customers within the ERP market. Even though Workday's SaaS offering provides customers an alternative that may provide a better total cost of ownership (TCO) profile, there are concerns that customers may take longer than usual to make the move to SaaS-based ERP.
There is a preference by IT buyers to use a multivendor strategy to get best-of-breed solutions; a potential roadblock for Workday Financials. The decision to use multi-vendors to fill ERP needs has been helped by standard integration links between disparate providers. As such, existing Workday HCM customers may opt to utilize their existing financials solution, potentially resulting in slower-than-expected adoption of Financials.
Fishbein's checks suggest that, when stacked up against Oracle, Workday has difficulty winning deals with international enterprises. This is in part due to Oracle's concerted efforts to box Workday out from its install base.
Both Oracle and SAP are offering SaaS ERP applications of their own which, though may not be up to the same standards of Workday's offering, should eventually get there.
On the positive side, Workday's platform could play a vital role in analytics. SaaS vendors (Salesforce.com, Workday, others) are in the early stages of creating interesting Big Data solutions that feed third-party data into their own data and delivers business insights from the cloud.
The benefit for customers is they would not need to worry about building out Big Data infrastructure, particularly in the small and medium business (SMB) market. Further this could dampen growth in the traditional database, data warehousing, and business intelligence market as data is shifted from on-premise datacenter silos to cloud providers.
Workday is already in the market with a big data solution that can tap multiple structured and unstructured data sources and combine them with Workday data to gain new business insights.
Fishbein noted that Workday leverages Hadoop to gain access quickly to data and discover information that is relevant to business questions without IT involvement. Workday should generate more than $6.0 billion in revenue, and expand margins close to 20 percent over the next 10 years at a minimum to justify its valuation.
On the valuation front, WDAY shares trade at 16 times its EV/2016 sales multiple. The multiple implies the company will be able to execute on its strategy and deliver well-above-average sales growth over the long term. Shares of the company have gained 67 percent in the last one year and 25 percent year-to-date.
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