salesforce.com (NYSE: CRM) and Workday (NYSE: WDAY) are together two of the hottest stock names in the software-as-a-service space. At valuations of 275 times trailing earnings and infinity-times-nonexistent earnings, respectively, they're also two of the most expensive stocks you can buy today. (On the other hand, with earnings due out from Workday on Feb. 27, and from Salesforce on Feb. 28, the valuations on both these stocks could change drastically before the end of this month.)
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This morning, analysts at famed investment banker Piper Jaffray made a bold call to buy both Salesforce and Workday stock, arguing that despite their high prices, both stocks could go higher -- all the way to $100 a share each, in fact.
Here are three things you should know about that.
Image source: Getty Images.
1. In defense of Workday...
Piper announced its upgrade of Workday stock before the market opened on Friday, arguing that its "channel checks" indicate that Workday's fundamentals have improved materially since last quarter, and recommending that investors "overweight" the stock, according to a write-up on TheFly.com this morning. Workday stock costs vastly more than Salesforce when measured by price to earnings (P/E), by free cash flow (P/FCF), or even sales (P/S). But according to Piper, "a premium valuation is warranted" because Workday's performance today is "the strongest in recent memory."
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Pier believes that Workday stock, currently selling for $85.50 a share, will hit a nice, round $100 valuation within a year, delivering 17% profits to investors who buy it today.
2. ...and Salesforce.com, too
At the same time, Piper hasn't fallen out of love with Salesforce.com. In the course of upgrading Workday, Piper made sure to mention that it still rates Salesforce "overweight" as well. As the analyst explains in a write-up on StreetInsider.com, Salesforce is expected to post "another strong quarter" when it reports earnings 11 days from now, which could help the stock hit its price target sooner rather than later.
Coincidentally, Piper assigns the exact same stock price to both stocks -- $100. But because Salesforce stock is currently cheaper than Workday, per share, this works out to an even bigger profits potential on Salesforce stock -- 23%.
3. One of these $100 price targets is not like the other
It should be emphasized that Salesforce.com has nearly 700 million shares outstanding, while Workday has only 125 million. Thus, a $100 price target on both stocks works out to a $69.7 billion projected market capitalization on Salesforce, but only a $12.5 billion market cap for Workday -- if both stocks hit their price targets. Regardless, Piper seems to be projecting more profits potential for Salesforce than for Workday.
At so much bigger a market cap than its rival, you might expect that Salesforce stock has less room to grow in the future. But as it turns out, Piper is not alone in its view that the larger company actually has the better prospects. According to a poll of analysts following both stocks on S&P Global Market Intelligence, the consensus is that over the next five years, Workday will grow its earnings at a 23% annualized rate, while Salesforce will grow at a 25% pace.
The most important thing: Valuation
And that fact could be key: Not only does Salesforce stock carry a lower P/E and P/S (i.e., it costs less) than Workday, but analysts believe that it will grow faster than Workday as well. Thus, while Piper Jaffray is telling investors to buy both stocks, if you only have enough money to buy one, Salesforce may actually be the better bet.
Free cash flow data support this thesis. Over the past 12 reported months, Salesforce has generated nearly $1.5 billion in real cash profits from its business, versus just $207 million for Workday. Adjusted for market cap, Salesforce stock therefore sells for 37.5 times trailing free cash flow today, versus an 83 P/FCF ratio for Workday.
Conclusion: While neither of these stocks looks cheap by any measure, Salesforce stock is at least cheap-er than Workday -- and the better buy.
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