Why Shares of Workday Inc. Aren't Working 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-based enterprise software company Workday declined on Thursday after the company reported largely in-line earnings. Down as much as 10% during morning trading, the stock had recovered some of its losses by 3 p.m., down about 6% on the day.

So what: The fact that the stock sank even as the company met analyst expectations is an indication that expectations from investors were high. Workday reported revenue of $226.3 million for the fourth quarter, up 59% year over year, and a few million dollars higher than the average analyst estimate. The company reported a non-GAAP net loss of $0.06 per share, in line with analyst expectations. On a GAAP basis, Workday's net loss for the quarter was $0.32 per share.

Workday guided for first-quarter revenue between $242 million and $245 million, above the analyst consensus of $239.5 million. Guidance for the full year also came in above expectations, with the company projecting 42%-45% revenue growth in fiscal 2016.

Now what: To say that Workday's valuation is generous would be an understatement. The stock trades at a staggering 21 times sales, even after the stock declined today. On a GAAP basis, Workday recorded an operating loss of $216 million for the full year, a whopping 27% of revenue. Even with the company's operating cash flow benefiting from the heavy use of stock-based compensation, and a big increase in unearned revenue, free cash flow was still negative for the year.

Given the valuation, it's not surprising that the market reacted negatively to Workday's results. Most fast-growing software companies like Workday at least manage to report positive non-GAAP earnings, usually thanks to adding back stock-based compensation; but Workday is unprofitable even on a non-GAAP basis. It seems as though the stock's valuation has completely detached from the fundamentals of the business; for that reason, Workday appears to be a very risky proposition.

The article Why Shares of Workday Inc. Aren't Working Today originally appeared on Fool.com.

Timothy Green has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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