Workday: Barclays Starts at Hold; Tech Edge, But Wait for Lockup Expiry
Barclays Capital 's software analyst Raimo Lenschow today began coverage of hosted software vendor and cloud computing supplier Workday ( WDAY ) with a Hold rating and a $58 price target, writing that its "modern technology architecture offers enterprise customers a compelling new value proposition" and that it may extend its "disruption" of traditional software from Oracle ( ORCL ), Microsoft ( MSFT ), and SAP AG (SAP) beyond its current franchise in human resources functions to the realm of financial accounting. But he thinks investors should wait until the stock is past its lockup expiration period for insider sales, given "The company has, in our view, a large liquidity premium due to its low free float post the IPO. This could change post the lock-up expiry (10 April)." "We would prefer to opportunistically build positions in the stock on pullbacks." Workday went public on October 12th. Workday is deserving of "excitement" based on its technology, writes Lenschow: In our view, Workday is a highly innovative company that has the potential to disrupt the markets it intends to operate in, and generally deserves the excitement it has generated among investors so far [...] The HCM market size is estimated by IDC to be $8.5bn in 2012, growing at a CAGR of 8.4% over the next 4 years to 2016. Forrester sees the HCM market as slightly larger at $9.5bn and also growing at about 8% over the same period. Looking at the vendor market shares and split of the HCM market, SAP and Oracle have the top two positions with about 30% of the market between them, according to IDC. Workday is ranked #4 by IDC [...] Forrester estimates the HRMS market to be $4.7bn, or about half the size of the HCM market. Additionally, SaaS-based HRMS is estimated to be growing at c. 15% y/y. The HR Management System lies at the foundation of the HCM market. The fact that this is Workday’s core competency is the first step in understanding why there is so much excitement around the name. The ability to deliver a modern HRMS solution places the company in a position to expand “upwards” to the adjacent HCM modules. But finance is a bigger target: While the HCM market is interesting, the bigger target for Workday is the Finance and Accounting market. The Finance or Accounting system is perceived as the “core ERP” function, as this controls all the financial data and manages business processes like accounts receivable/payable and accounting methods (e.g., asset accounting). Other features can include collection, tax reporting and even analytics. The financial system can also act as the backbone for other business applications; for example, as mentioned above, there is increasingly closer integration between the performance management/ compensation management system and the finance system [...] Given finance application’s importance within a company, many IT departments have been very unwilling to undergo change. As such, the market has evolved with SAP and Oracle as the largest vendors enjoying a large and sticky installed base [...] By being involved in more business functions, Workday seeks to increase its Total Addressable Market. As stated above, HCM and Financial Accounting represent $8.1bn and $16.4bn, respectively. The market sizes for the different categories are shown in Figure 11. The 4 year CAGR of all five categories combined is 6.7%. The Total Addressable Market size is $34.2bn, although at the moment Workday does not have a major presence in markets outside of HCM.
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