Why Shares of Workday Inc. Slumped Today

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of cloud software company Workday slumped on Wednesday despite the company beating analyst estimates and providing in-line guidance when it reported its first-quarter earnings. At 12:20 Wednesday afternoon, the stock was down nearly 12%.

So what: Workday is a stock with a valuation mostly supported by extreme optimism. The stock traded at around 22 times sales before the earnings report, and at that level, the company needs to consistently exceed expectations in order to keep its stock price afloat.

Workday is still growing quickly. The company reported revenue of $251 million during the first quarter, up 57.1% year-over-year, about $6 million higher than analyst estimates. It reported a non-GAAP loss of $0.02 per share, six cents better than what analysts were expecting, while on a GAAP basis the company lost $0.33 per share.

Workday's guidance for the second quarter was in-line with analyst estimates. That's something that normally shouldn't be an issue, but since Workday has consistently exceeded analyst estimates in the past, the stock sold off in response.

Now what: Volatility is nothing new for Workday, and with its stock still trading around 20 times sales, any sign at all that growth is slowing will likely send it tumbling. That's exactly what happened today, and this probably won't be the last time it happens.

With an extremely lofty valuation, Workday remains a very risky stock. Investors betting that the company can continue to grow rapidly for years to come are paying a high price to do so, and I'm happy to avoid the stock altogether.

The article Why Shares of Workday Inc. Slumped Today originally appeared on Fool.com.

Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.