Opportunity in a hot software company back to its IPO Price

Friday's major sell off was downright brutal, and no sector was hurt more than cloud software and internet companies due to Linked In's earnings report which sent its stock $84 lower vaporizing 44% of its market cap. Internet software companies, in many cases known as cloud software companies were also sold off in a big way and shares for ADSK, ADBE, INTU, WDAY, N, CRM and NOW all took a beating.

Shares of Workday (WDAY) currently trade at $48.55, which is close to it's IPO price of $48.05 back in October 2012. During the past two months shares have declined from $85 to $48, giving up 43% and we feel like this has been overdone.

WDAY still loses money, but their revenues have grown at high double digit percentages for the past two years, they are in the early stages of a major revolution from on-premise based ERP systems to cloud based enterprise software, and the price for investing in this growth and capturing market share is an operating loss to the tune of $215M for their year ended January 2015. Workday has $490M in long-term debt, and sports a current ratio of 3.3, which is respectable for any company that is investing in growth while operating on a global scale.

There could be more pain in the market and specifically in cloud names, however our long-term view is that the sector will bounce back and handsomely reward the leaders in the sector. We are buying the January 2018 $67.50 Calls for $7.00. This is a long-term trade and not something that we will close in a few weeks or months. If we see a larger pull back, we will likely sell Puts at a deeper out of the money strike to help finance this Call purchase. In the meantime, buy the call and wait for the stock to recover. This is a company with a top-notch seasoned management team that has a knack for riding major software trends to success for years.