Shares of Workday Inc, a human resources software provider that has yet to turn a profit, closed up 74 percent in their market debut on Friday, leading some to question the lofty valuation.
In the biggest tech listing since Facebook's rocky stock listing back in May, the Pleasanton, California-based company closed its first day of trading at $48.69.
The cloud computing company whose services compete with rivals such as Oracle Corp opened New York Stock Exchange trading at $48.05. The stock touched as high as $51.32 after pricing shares above the expected range at $28.00.
Workday sold 22.75 million shares, raising $637 million. It said it will use IPO proceeds for expansion and working capital.
Earlier in the week, Workday raised its price range to $24 to $26 per share from $21 to $24 per share.
The IPO values the company, founded by ex-PeopleSoft executives David Duffield and Aneel Bhusri, at almost $4.5 billion. Duffield and Bhusri left PeopleSoft following its acquisition by Oracle Corp in 2004 for $10.3 billion.
Workday is now among the most richly valued of recent cloud computing IPOs, with a valuation of 22 times trailing sales in the last twelve months.
IT software company ServiceNow, which went public in June, was valued at roughly 14 times during the time of its IPO, while e-commerce platform provider Demandware was valued at 17 times.
"Workday can grow when it's smaller, but the question becomes when they get in excess of a billion in revenue, can they still bolt on this high growth rate to justify its valuation?" said Rick Summer, an analyst at Morningstar.
TAKING MARKET SHARE
Workday, whose software helps companies manage employees and other resources, will have a dual class voting structure, with Class B shares worth 10 times the voting power of Class A shares.
Cloud computing technology, which lets customers access their data from remote servers, is thought to be faster and cheaper than traditional methods.
Companies based on this technology like Workday and Cornerstone OnDemand Inc are grabbing market share from larger tech players like Oracle, SAP AG and International Business Machines Corp as they digest recent acquisitions in the human resources software sector.
These companies are trying to tap into a market estimated to be valued at $9.5 billion, according to Forrester Research.
"There's millions of small companies who need a systematic way to manage human resources," said Charlie Smith, chief investment officer at Fort Pitt Capital Group in Pittsburgh, Pennsylvania which manages $1.3 billion. "As long as Oracle and others don't have the specific modules that a smaller business might need, there are going to be niches for players like Workday."
Gartner analyst Thomas Otter said Workday was the first real challenger to SAP and Oracle and it forced the two established companies to invest in new products.
Workday has more than 340 customers including American International Group Inc, Flextronics International Ltd and Kimberly-Clark Corp.
Workday sells its software to customers on a subscription basis, giving the company visibility into future revenue and allowing potential investors to estimate growth.
"A customer will sign a three-year deal with Workday and they're going to get a monthly or annual payment for the next several years," said John Jarve, a managing director at Menlo Ventures. "The attractive thing to an IPO buyer is a recurring revenue stream."
Workday's revenue nearly doubled in 2011 to $134.4 million. Its net loss widened to $79.6 million from $56.2 million.
The company's venture backers, Greylock Partners and New Enterprise Associates, are not selling any shares in the offering.
MORE IPOs, DEALS TO COME
Workday is one of a slew of recent IPOs from cloud-based companies including ServiceNow, Demandware Inc and Guidewire Software Inc.
Shares of these companies have jumped in the last year, as consumer-oriented companies like Zynga and Groupon have struggled.
Other cloud-computing companies may follow in Workday's footsteps with initial public offerings, said Ira Cohen, co-founder of Updata Partners which invests in software companies.
"There are a number of companies that will ride the business-to-business enterprise wave," he said. "This will hopefully open up the market for some very good companies."
Bankers say potential near-term IPO candidates include cloud-based companies like SilkRoad Technology Inc of Winston Salem, North Carolina, San Francisco-based ZenDesk and Australia-based Atlassian.
Gartner's Otter expects further consolidation in the market. In less than a year SAP, Oracle and IBM have all made major acquisitions.
SAP bought SuccessFactors for $3.4 billion in cash last December, Oracle followed by acquiring rival Taleo Corp for about $1.9 billion in February and IBM snapped up Kenexa Corp for around $1.3 billion in August.
Duffield and Bhusri's PeopleSoft was acquired by Oracle in a hostile takeover led by Oracle CEO Larry Ellison which took over 18 months.
Morgan Stanley and Goldman Sachs were lead underwriters for the Workday offering.
(Additional reporting by Nicola Leske; Editing by Gerald E. McCormick, Peter Lauria, Phil Berlowitz, Sofina Mirza-Reid and David Gregorio)