This Just In: Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

Time to start the Workday (coverage)
Less than a month after Workday (NYS: WDAY) debuted on the public markets, Wall Street is finally getting its chance to chime in on the company's prospects. Yesterday, more than half the original underwriters in the company's IPO issued their first recommendations on the stock. Unfortunately for Workday's fans, however, the reviews were decidedly mixed.

On the one hand, firms like Pacific Crest and Wells Fargo were full of happy talk about the firm. Wells Fargo, which rates the stock an outperform, takes the very long-term view that "in the next five years, Workday will be a significantly larger business than it is today ... Workday has many competitive technical and business model advantages that should enable Workday to annually increase revenue by 50%+ over the next three years."

Pacific Crest is no less enthusiastic, but no more specific about the company's prospects for profits, and spends a lot of time talking about Workday's "state-of-the-art technology" and "multitenant architecture, object-oriented technology framework, in-memory data management, consumer user interface and configurable processes." As far as actually profiting from these technological wonders, however, PacCrest says it's looking for a $1.18-per-share loss this year, and $0.80 per share in cash burn. Hardly a ringing endorsement, the buy label notwithstanding.

The flip side
Meanwhile, while none of the company's underwriters were so gauche as to recommend an actual sell rating on the stock, at least two now rank among the analytical undecided. Both JPMorgan Chase and Goldman Sachs go only so far as to assign neutral ratings.

Why not more than that? Goldman explains that Workday is a "dominant player in the fast growing SaaS landscape," and the analyst's "very optimistic on Workday's competitive positioning," and rapid growth in revenues. That said, realistically, Goldman says there's "limited upside near term given valuation."

And really, Goldman has a point. $7.8 billion -- Workday's current market cap -- isa lot to pay for a company that's not earning any profits. For a company that, to the contrary, has accelerated the speed at which it loses money in each of the past five years, and whose management says it intends to continue losing money "for the foreseeable future."

Result: with no profits to value it on, investors are basically forced to value the company on its unprofitable revenues. Specifically, to value it at 40 times those unprofitable revenues.

Running the numbers
Is this a fair price to pay? Is it even a defensible valuation?

For comparison, (NYS: CRM) , a company with a longer track record of growth and a projected growth half (27%) that of Workday, sells for a price-to-sales ratio less than one fifth Workday's -- just 7.6 times sales. Meanwhile, solidly profitable, established database players like SAP (NYS: SAP) and Oracle (NAS: ORCL) sell for only about four times sales apiece. Granted, they're growing slower, but still -- that's a factor of 10 difference in the P/S ratios.

Result: For Goldman to be wrong about the lack of a chance for upside, Workday investors have to ask themselves -- how much greater a multiple-to-sales do they think Workday deserves? 50 times? 60 times? 100 times? And that's before you even get into the question of whether a company is worth buying solely on the basis of its ability to sell stuff, with no regard for profiting from the sales.

Foolish takeaway
Regardless of what you think of the company's prospects as a business, the fact remains: We have no path for profit laid out for us. Even the most optimistic analysts out there say admit that they see the stock continuing to lose money way out into 2016, and maybe beyond.

Until Workday gives us a basis for expecting something different, for calculating a time certain when the company might turn profitable, there's really only one way to profit from this investment: Buy it... and then find a greater fool to sell it to.

The election's over, and Obama is o-backa! Which stocks will prosper under his second term? Find out in our electoral investing report: "These Could Skyrocket After the 2012 Presidential Election." Download your copy now, for free, and discover hidden ways to profit from the election.

The article This Just In: Upgrades and Downgrades originally appeared on

Fool contributor Rich Smith has no positions in the stocks mentioned above. The Motley Fool owns shares of JPMorgan Chase and Oracle and has the following options: short JAN 2013 $150.00 calls on Salesforce and long JAN 2013 $150.00 puts on Salesforce. Motley Fool newsletter services recommend Salesforce and Goldman Sachs. 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.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.