Salesforce Stock Analysis: Why Salesforce Is A Better Long-Term Cloud Play Than Workday

  • Workday, the leading cloud HRM company, has seen it shares selling off after the company issued soft second quarter guidance while billings growth came in lower-than-expected
  • Meanwhile leading CRM company Salesforce handily beat consensus estimates and offered robust guidance as well
  • Salesforce is a more mature SaaS company than Workday and it appears to have better growth runways making it the better long-term investment

Shares of leading cloud HRM company, Workday (NYSE:WDAY) have been selling off after the company announced FY 2016 Q1 results. Workday shares are down 15% after the company beat both top and bottom line expectations but issued soft guidance for the current quarter. Workday revenue came in at of $251 million, good for 57.1% Y/Y growth and $6 million higher than consensus estimates, as well as EPS of -$0.02, $0.06 better than analysts’ estimates. However, Workday’s billings, an important indicator of future revenue, clocked in at 31%, considerably slower than its historical growth. Additionally, the company’s second quarter revenue guidance of $270 million-$274 million will only be good for 45%-47% growth, way lower than past growth.

HRM Competition

Workday is still regarded as the leading cloud HRM software provider. A Forrester SaaS HR Management Systems report published last year ranked Workday as the cloud HRM market leader, while Oracle (NYSE:ORCL) was seen as providing competitive options. But, it appears that Workday’s products, despite still being the best-of-breed, might be losing their edge over those by competitors, Oracle and, to a lesser degree, SAP (NYSE:SAP). Oracle has been pricing its new HR/HCM products very aggressively in a bid to win more market share, which appears to be placing Workday’s premium offerings under a lot of pressure. This is being further compounded by the fact that SaaS HRM market penetration is rapidly maturing, leaving Workday with less pricing power. Furthermore, some of the Workday new products such as Workday Talent Insights are still unproven while others such as Workday Professional Services Automations have become commoditized. It appears as if the erstwhile rapid-growth cloud HRM market is close to hitting an inflection point, which bears ominous overtones for the likes of Workday.

CRM Growth

In contrast to Workday, leading cloud CRM company, Salesforce.com (NYSE:CRM), appears to be in a good place. The company enjoys 16.1% share of the CRM market, almost as big as the combined market shares of its two biggest rivals, Oracle and Microsoft (NASDAQ:MSFT) with 10.2% and 6.8% share, respectively. Salesforce was recently ranked the leading cloud CRM software vendor by Gartner for the third year running. The Gartner report stated that Salesforce not only has the highest CRM revenue, but was growing its market share faster than all its rivals.

While Oracle’s upcoming HR/HRM products are giving Workday a run for its money, the same cannot be said when it comes to its CRM products competing against Salesforce’s. Oracle has mainly grown its CRM portfolio through acquisition of companies such as Siebel, PeopleSoft and BEA Systems in what appears to be a strategy based on trying to cover as many bases as possible, but which has led to overly disparate offerings that tend to leave buyers wondering about product roadmaps. Meanwhile, Salesforce’s CRM products are mainly home-grown leading to highly cohesive and streamlined offerings.

Becoming Profitable

The best thing about Salesforce, however, is that it appears to be close to start becoming consistently profitable, which is a big plus for a SaaS company. The company not only managed to beat on both top and bottom line expectations during its latest quarterly report (Salesforce Q1 2016 results), but posted a GAAP profit, albeit a thin one, breaking away from a long string of losses. SaaS companies typically spend a large proportion of their revenue on sales and marketing expenses. Many in fact spend more than half of their revenue on this single line item, which acts as a big drag on profitability. SaaS companies in the growth stage try to build as large a customer base as they can to ensure they can generate enough cash flows to cover their operational expenses. They do this as a matter of necessity due to the SaaS revenue model that means companies incur most of their expenses upfront but realize the revenue benefits gradually as the months roll on. Salesforce’s top line growth has slowed down partly due to the law of large numbers (the company is currently on a $6 billion-plus annual revenue rate) and partly because it has started slamming brakes on its customer acquisition spree. Lower marketing expenses by the company has taken it closer to profitability. Meanwhile Salesforce’s top line growth seems to have found a floor after a period of jitters regarding how low it could go, which removes the element of uncertainty that investors tend to dislike. Once Salesforce becomes consistently profitable, expect its shares to hit fresh highs.

You can see Amigobulls' Salesforce stock analysis video and Workday stock analysis video for a quick roundup of key fundamentals.

 

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