"A common mistake that people make when trying to design
something completely foolproof is to underestimate the
ingenuity of complete fools."- Douglas Adams
A Hitchhikers Guide to a Post-Burst Tech Bubble Reflate
World: Short Workday
The worst thing about a bubble popping is trying to figure out
what to do next. This is because so much energy is expended chasing
something elusive that one is often ill prepared for what comes
next. Oh, how we miss having conversations with people about why
) and Plug Power (
) aren't scaring us out of our Veeva (
) short, and better yet why we are happily shorting growth stocks
into earnings that we are dead certain will beat and raise
guidance. Yep, those were the days. What we wouldn't give for
another Castlight to come along or for some VC to coin another
catchphrase like "Vertical is the new horizontal." Or if we could
just turn back the clock a bit to right before David Einhorn's epic
) presentation. Just a few more YouTube clips of Jonathan Bush
making outlandish claims like he invented the question mark would
O Bubble, Bubble! wherefore art thou bubble?
We spent so much time getting to know each other over the past
year, and then poof you are gone. No phone call, no email, and not
even a WhatsApp message. We woke one day feeling more like Batman
in a Joker-less world, left to sift through the post-apocalyptic
tech momo ruins. There is something decidedly unsettling about
having momentum investors actually agree with you about anything.
Markets don't seem right to us when the momo crowd are not behaving
like Superman with the FirEye (
) and Splunk (SPLK) trunk. What you are short Veeva too? What color
is the sky above? Who got the better end of the Bergdahl trade?
Please, let's disagree on something so we can get our bearings
Who knows, maybe this is what short-seller depression feels
like. Did Prozac Nation cover this? Is there some sub-specialist on
Wall Street that we can talk to? Will reading Shantaram help pass
the time till the next bubble? So many questions so few answers.
Maybe participating in the next funding round for Uber will help
ease the pain. Or how about a sit down with the self-proclaimed
'Supergenius' from the Tesla shareholder meeting, maybe he has the
Just one good idea is all it's going to take to get us out of
What about shorting Zillow (Z) on Willow thesis? Both appear to
be overachieving conjurers. Now if we could just find the
connection between Madmartigan, Tiger, and Chase Coleman. Is Julian
Robertson a Ron Howard fan?
(click to enlarge)
Ok, that's a bit of a stretch. But as you can see, a bubble-less
world can be a lonely place for a short-seller.
But luckily for us momo investors have the memory of a
So while we look forward to the journey of self-discovery a
bubble-less world might provide; we were happy to discover that we
get to postpone our existential reckoning till another day.
As usual, all we had to do was wait a bit for our momo friends
to get restless and start chasing the same stocks again!
And that is precisely what they have started to do.
Like a Phoenix Rising from the Ashes…
The momo stocks have come back to life over the past few
And with momo's back en vogue, it is time to start putting the
post bubble pop reflate short trades on.
(click to enlarge)
The notable difference being that this time around we will focus
on the crème de la crème instead of the trash.
(click to enlarge)
Short Workday (WDAY)
Shorting Workday is probably our single best idea in the SAAS
space right now, and it doesn't take more than few paragraphs to
get across. Now some people might think this is a ridiculous
statement, but we suggest you hear us out. Before the bubble
popped, Workday was a stock we steered clear of on the short side
along with other tier one names and even some tier two SAAS names.
The logic being that until a bubble pops its existence remains
debatable, and thus valuing stocks in such a sector is an exercise
in futility. With valuation generally on ice, what matters most in
such an environment is simply execution, story, and perception. As
far as Workday went, you were guaranteed to lose big on all three.
Consequently, we focused our energy on pseudo SAAS stocks or on
SAAS names where we believed we could articulate a multi-pronged
and airtight argument as we did with Veeva. But post-bubble, the
tier one names is the place we believe you should be if you are
looking for short exposure.
The Big Short:"I don't get it"
We think the best way to explain our Workday short thesis is by
drawing an analogy to Josh Baskin's (played by Tom Hanks)
in the movie Big. For those that have not seen the film, after
listening to tons of data and studies about a potential new toy,
Josh takes over the meeting with his basic "I don't get it"
question. "What's fun about a building that turns into a robot," he
asks the room filled with toy executives? A seemingly simple and
innocent question that somehow turns into a boardroom wakeup call.
It's a priceless moment on film, and it sums up exactly how we feel
We simply don't get it!
We literally can picture ourselves in a room filled with Workday
bulls rattling off revenue growth metrics, facts about the founders
(Duffield moonlights as Batman and Bhusri churns out new talent
modules in his sleep), new modules that will soon be released, and
everything else under the sun you can think of about this great
And then little old us sitting in the back of the room with our
hand raised waiting to be called on….
"Blah, blah, blah. We don't get it!"
This is still a $15 billion company that sells HCM software
trading at 30x trailing revenue. ServiceNow (NOW) grew at a faster
clip last year of an almost identical revenue base, and yet has
half the market cap. What about Salesforce.com (CRM)? 8.5x the
revenue, superior margins, grew at roughly half the rate of Workday
last year, and it's only double the market cap. Aren't these both
loved SAAS Cloud companies? Actually, can't you make a convincing
argument that both of these companies are much better positioned in
their respective parts of the SAAS atmosphere than Workday is in
the much more crowded HCM space? We think you can, and this is
where the Workday short comes in. The company is so good that it's
If you surveyed 50 seemingly educated market participants on
what is the world's leading SAAS company, we bet the responses
would come back an even split between Workday and Salesforce.com.
That is pretty remarkable when you consider just how much money
Salesforce.com spends on marketing, and how much bigger they are as
a company. So what gives? Well, the founders' background played a
huge part, but to be frank Workday simply came public at the right
For example, if Salesforce.com had gone public last year we
think it would have hit a $75-$100 billion market cap at the peak
of the bubble, and would probably still be trading 50% higher than
where it is today.
To be clear we are citing Salesforce.com here not just because
it is a massive cloud leader, but more importantly because a lot of
short sellers continue to focus on the name.
Our message to them: Get your head out of the Clouds!
How can anyone be short Salesforce.com in a world in which
Workday trades at the valuation it does?
We could accept these distortions pre-bubble collapse when the
likes of Veeva could hit $7.5 billion and Castlight opened at $4
billion, but tight floats and IPO mania had a lot more to do with
that than actual sector valuation disconnects. Now that everything
is no longer simply rising with the tide, it's hard not to simply
look at Workday and conclude where it sits between #1 and #3 in the
cloud makes little sense.
Then again this is Workday we are talking about here. No SAAS
company gets more press and more love from the media than these
guys. Are they an HCM software company or are they about to cure
cancer? It's a seemingly crazy question to ask, but one that is
justified based on where the stock is trading relative to
We love this short because it can be hedged with a long position
in Salesforce.com, and because it really is that simple. What made
Workday invincible before is no longer as much of a concern. More
investors should be willing to take a look at the name and reach
the same conclusion we have. That has not happened yet, and we say
this having scoured everything written about WDAY on SA, Sumzero
and other places in the financial media where we usually come
across some sort of decently articulated skepticism. The extent of
the Workday bearishness has been limited to simple valuation calls
early on that focused on analyzing the name within the context of
traditional/historical valuation metrics that apply to any stock.
We have yet to come across anyone making the simple case that
Workday makes the other SAAS titans look like value stocks. Why?
Well, our theory is it simply was not the right time in the cycle.
A lot of garbage had to be exposed before investors could justify
thumbing their noses at the likes of Workday.
Another interesting development with WDAY shares is the
ever-increasing short interest, and we're sure this is a point
skeptics will highlight. Short interest has steadily increased in
the stock over the past year, but when compared to the average
volume traded it has actually dropped, below are the statistics
courtesy of Nasdaq:
(click to enlarge)
Workday's short interest has nearly doubled since January 2014,
but in the big picture short interest is still less than 15% of the
float. So the 'short squeeze' argument that seems to be playing out
in the likes of Zillow is not a factor here. We could easily
conceive short interest jumping to 30%+ of float, which would not
bode well for longs especially since so much of the accumulation in
the stock is from recent levels.
(click to enlarge)
Now, all you need to do is take this simple table (below), and
challenge the bulls to provide you with an explanation. There is no
need to debate the SAAS or Cloud fundamentals here. Heck, you can
even tell them you are the biggest believer in the space, and then
sit back and watch them squirm as they try to explain this
2013 Revenue ($mln)
Enterprise Value ($mln)
2013 Revenue growth rate
2013 Gross Margin
2013 Non-GAAP Operating Margin
Cloudy with a Chance of TAM
We want to keep this short simple and fun for now, but for those
prepared to dig in the TAM story here is a good one. HCM, where
WDAY derives almost all of its revenue these days, is arguably as
small as $5 billion and no bigger than $10 billion. That puts the
current market cap at 1.5x to roughly 3x the HCM market size (not
exactly a Veeva which at its peak was trading at 7.5x-15x the LS
CRM market TAM as a value added reseller, but still pretty
eye-popping considering the competitive landscape difference).
Workday is not just about HCM though. Financial accounting,
procurement, project management, and T&E are in their grand
plans of ERP domination. How big is that broader market? Well,
something around $30 to $40 billion seems right with HCM and
Financial Accounting making up 75% of that. So, Workday is
basically being valued at half the broader market size despite
being somewhere to the tune of 1-2% penetrated with negative 20%
operating margins. We'd call this being just a bit overly
The Iron Throne of HR Software
We mentioned competitive landscape distinction versus a vertical
like Veeva being an issue, but we think that's an understatement.
We liken Workday's quest to conquer the HCM space to that of one
house maintaining a firm grip over the Seven Kingdoms on Game of
Thrones. It's just not something you want to bet on, and definitely
not when everyone else thinks it's a sure thing.
Keeping up with all the players involved in the HCM space is
just as challenging of a task as following all the characters,
plots, and subplots on Game of Thrones. We could probably put out a
fifty-page report on all the players involved, but for now this
bird's-eye view should suffice.
- The House of Ellison is strong with virtually unlimited resources
and influence across the seven kingdom of enterprise resource
management. Currently their traditional HR offerings consists of
the comprehensive HCM Oracle E business Suite as well as PeopleSoft
suite. However, Oracle's cloud HCM roadmap has really centered on
its Taleo acquisition. Basically, they have chosen to leverage
Taleo's strength in recruiting and performance/goal management to
cross-sell a talent cloud suite to existing EBS/PeopleSoft
customers seeking SAAS solutions in talent management as well as to
- In the East, SAP has chartered a similar path to the Iron throne.
They continue to offer their traditional HCM/ERP Business Suite for
those seeking on-premise offerings as well as simply focusing on
core HR functionality, and have turned to their recently acquired
SuccessFactors army to fight the SAAS battle. Like Oracle has
leveraged Taleo's recruiting strength, SAP has leveraged
SuccessFactors performance and learning modules to sell a full
suite of talent cloud solutions.
- From the North, IBM is leveraging its Kenexa acquisition to also
offer a broad talent management suite to its large global installed
customer base. The notable difference being a much broader emphasis
on the strong assessment/analytics offerings of their recruiting
Cornerstone OnDemand (CSOD)
- Born of pure SAAS lineage, this leader in learning and
performance management has excelled by building strategic alliances
instead of marrying into one of the larger houses.
These are just a few of the players jostling for a piece of the
Iron Throne of HCM.
warriors from beyond the wall, the
, the Giants of the
Tribe Soldiers, and the
Changelings are amongst a few of the other players you are bound to
come across in the land of HCM.
(click to enlarge)
Make no mistake Workday is a monster success story, but the
stock is about five years ahead of itself assuming flawless
Doing the math on 10% net margin assumption and a commanding 10%
market share of the broader $40 billion ERP space over the next 4-5
years, (both unbelievably generous assumptions) still gets you a
stock that should be trading at half where it is today. Thus, it is
a better short at this juncture than plenty of bad businesses, and
from a risk reward standpoint we can't ask for much more. Our view
is that there is an easy 25-30% downside in this name from current
levels, given at least a 6-month timeline. The key word here is
'easy'. There are plenty of short opportunities with far greater
upside in this space, but frankly none are as easy to single out as
a pure outlier in the way Workday is relative to the other big
boys. This is what makes it unique as a 'short idea' at this point
in time. There are about a dozen sub $3 billion recent tech
IPOs/SAAS stocks, which you could convincingly argue have 50% plus
downside. There are also a handful of names like Castlight that you
could argue will lose 75%+ of their value. While we are short
several of these stocks, it's really tough to single out one or the
other at this point. Tight floats and super high short interests
guarantee a slower bumpier ride for the collective next leg of
their journey into market oblivion. Basically, these are all more
appropriate long-term basket shorts here versus the singled-out
case we see in Workday shares.
Suhail Capital Limited is an exempted company registered
in the Cayman Islands ("Suhail Capital") is an investment advisor
to funds that actively participate in the buying and selling
securities and other financial instruments.
You should assume that as of the publication date of this
report, Suhail Capital (possibly along with or through our
partners, affiliates, employees, and/or consultants) along with
our clients and/or investors and/or their clients and/or
investors has a short position in Workday Inc. "Workday" (and/or
options, swaps, and other derivatives related to the stock), and
therefore stands to realize significant gains in the event that
the price of Workday should decline. You should also assume that
as of the publication date of this report, Suhail Capital
(possibly along with or through our partners, affiliates,
employees, and/or consultants) along with our clients and/or
investors and/or their clients and/or investors has a long or
short position in Salesforce.com, ServiceNow and any other
publicly listed company in this report (and/or options, swaps,
and other derivatives related to these stocks) , and therefore
stands to realize significant gains in the event that the price
of Salesforce.com, ServiceNow or any other company listed should
increase or decrease.
Suhail Capital strongly recommends that you do your own
due diligence before buying or selling any of the securities
mentioned in this report.
We intend to continue transacting in the securities of
issuers covered in this report for an indefinite period after its
publication, and we may be long, short, or neutral at any time
hereafter regardless of our initial recommendation.
This report expresses our opinion, which we have based
upon generally available information, field research, inferences
and deductions through our due diligence and analytical process.
To the best of our ability and belief, all information contained
herein is accurate and reliable, and has been obtained from
public sources we believe to be accurate and reliable, and who
are not insiders or connected persons of the stock covered herein
or who may otherwise owe any fiduciary duty or duty of
confidentiality to the issuer. However, such information is
presented "as-is," without warranty of any kind, whether express
or implied. Suhail Capital makes no representation, express or
implied, as to the accuracy, timeliness, or completeness of any
such information or with regard to the results to be obtained
from its use. All expressions of opinion are subject to change
without notice, and Suhail Capital does not undertake to update
or supplement this report or any of the information, analysis and
opinion contained in it.
Please refer to the below link for our Term of Use
applicable to this report and any other publication issued by
The author is short WDAY, VEEV, CSLT. The author wrote this article
themselves, and it expresses their own opinions. The author is not
receiving compensation for it. The author has no business
relationship with any company whose stock is mentioned in this
General Electric: Who Said That The Growth Story