FORTUNE -- The technology industry loves an underdog, especially when a scrappy startup makes breakfast of a bloated incumbent. In enterprise software, Workday (WDAY) has emerged as just such an underdog, using a cloud-based business model to handle human-resources software and take on giants like Oracle (ORCL) and SAP (SAP).
Workday was founded in 2005 by Dave Duffield and Aneel Bhusri a year after Oracle made a hostile and successful hostile bid for their previous company, PeopleSoft. Duffield, a software veteran who bore little love for Oracle, received the news in a lonely hotel room.
Workday wasn't payback, as much as it was a chance to create a successful software company in an area where Oracle wasn't looking – software as a service, or human-resources programs tapped on demand in the cloud. By early last year, as JP Mangalindan noted at the time, Workday had Oracle, SAP and other giants on the defensive.
In October 2012, Workday went public at $28 a share and a market value of $4.5 billion. In the 14 months since, Workday's market cap has nearly tripled to $14 billion. That's half the value of Salesforce.com (CRM) and one eleventh of Oracle's. The company's revenue is expected to grow 70% in its fiscal year ending next month, after rising 77% last year. That growth is coming as gross margins inch up, to 64% last quarter.
A few weeks ago, Workday impressed Wall Street by not only beating analyst estimates but also by projecting even better revenue this quarter than they were expecting. Analysts found encouragement in the 50 new customers signed up in the quarter and the interest among companies in its new financial-management software, which showed the company may succeed into branching out into new areas.
"We believe Workday has amongst the most attractive share gain potential in software," wrote Ross MacMillan of Jeffries & Co. Added Pacific Crest's Brendan Barnicle, "The continued momentum of the financials product is very encouraging, because it is the biggest source of future continued growth for the company."
If Duffield and Bhusri were looking for revenge, they were close having it. Like Salesforce.com, Workday showed the promise of the cloud in enterprise software was being fulfilled today. The on-demand model is working. Wall Street loves Workday -- sending it up 46% year-to-date -- certainly more than it loved SAP and Oracle, which are flat with the beginning of the year, or even IBM (IBM), which is down 9%.
There is only one problem. Workday is nowhere near showing a profit. The bottom line -- the metric that is most closely watched among investors -- isn't measuring success.
Workday bulls argue that the company is investing heavily in future growth, and that the per-share loss is declining. In the most recent quarter, Workday posted a net loss of 27 cents a share, down from 67 cents a year earlier. Both points are true, but the per-share loss is misleading: The company's common shares outstanding nearly tripled over the past year to 174 million from 62 million. The actual net loss rose to $48 million last quarter from $41 million a year earlier.
Operating expenses are declining as a percentage of revenue, but not by much. In the first nine months of this year, total operating expenses were equal to 132% of Workday's revenue. In the same period in 2012, they were equal to 145%. Granted, Workday was moving into new areas like financial-management software, but at this rate it could take several years for Workday to see black ink.
The chart below shows the trailing 12-month revenues and losses for Workday. The company is fueling its impressive revenue growth by adding to its losses, taking market share from incumbent giants as an upstart challenger must do.
But even valued against growing revenue, Workday is priced for success that lies several years away. At its current stock price, Workday is trading at 30 times its estimated earnings for the current fiscal year. That compares to a price-to-sales ratio of 7.5 for Salesforce.com.
Salesforce has a longer history in the stock market, having debuted in 2004. Its chart shows a longer trend of rising revenue coupled with net losses or slim profits. Salesforce's operating margins have hovered between -1% and -9% for the past couple of years, not as bad as Workday's but also nowhere near Oracle's, which have averaged around 40%.
Taking on a company like Oracle isn't easy. It means investing in cloud infrastructure, software R&D, and a sales staff to persuade companies to embrace on-demand software. It can also mean competing against giants on price to win deals. Being an underdog can be tough, but it helps when investors are expecting high profit margins from older giants but not from you.
For now, that's working in Workday's favor. But the success the company is seeing in winning new customers is leaving its price at a precarious level. The high valuation of Workday's stock, however, has one more benefit: Up here, Oracle is unlikely to be staging any hostile takeovers of the company.
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