Workday Needs a Day Off

NEW YORK ( TheStreet) -- When a tech investor has made up his or her mind, it's like pulling teeth to explain that "valuation" does eventually matter.

I accept the fact that Wall Street has an insatiable appetite for growth. That appetite, though, is only matched by the Street's strong willingness to blame someone else when expectations fall short.

I won't deny that Workday ( WDAY) has built itself into a solid Software-as-a-Service (SaaS) company. I'm not willing to ignore how expensive the stock is. This is the same issue I've raised with rival Salesforce.com ( CRM).

The Street, meanwhile, has shown no reservations about placing enormous bets on companies it thinks can produce the sorts of returns that justifies the premium. But it doesn't always manifest itself into results. With strong rivals including IBM ( IBM), SAP ( SAP) and Oracle ( ORCL) showing no meaningful signs of slowing down, I worry Workday investors may be bidding up these shares without fully appreciating the havoc that one slip may cause.

To that end, I believe the software company's price-to-earnings ratio of negative 50.32, ( according to Nasdaq), puts Workday in laborious territory, even though the company has delivered some pretty solid results. More than anything, that's all Workday bulls want to discuss.

Look, with revenue soaring 72% year over year in the recent quarter, I don't believe anyone is denouncing the company's performance, especially since the company beat estimates by roughly 7%.

My issue is with the "risk versus reward" scenario. Absent in all of the Workday euphoria are the realities that competition can throw a wrench into those expectations and send shares spiraling back down to what I believe are true fundamental levels. Yes, I appreciate that deferred revenue shot up 32%. It was also encouraging that "billings," which is the metric that indicates the strength of future sales advanced 36%.

But again, is this not the level of performance for which the Street has been paying? When you're willing to pay a high valuation for strong growth, you shouldn't' be surprised when you get it. But I wouldn't get carried away just yet. As is often the case, competitive threats can sometimes be delayed. What's more, with virtually no earnings to speak of, what's to get excited about? The strong growth is only as impressive as what trickles to the bottom line.

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