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What the Explosive Workday IPO Says About Tech Stocks

There has been much ado about the drought in the IPO market this year. The Facebook (NASDAQ:FB) IPO debacle is still fresh in many trader’s minds, Dave & Buster’s withdrew its public offering last week and the general atmosphere has not been receptive to new issues on Wall Street.

Well Workday (NYSE:WDAY) hit the market today without a hitch despite all this. The Workday IPO priced at $28 — above the $24-to-$26 range — and has seen shares soar to nearly $50 a share!

So what makes the Workday IPO different? If you said “cloud computing” you’re close… but that’s a canned catchphrase that all tech companies from Hewlett-Packard (NYSE:HPQ) to Microsoft (NASDAQ:MSFT) are throwing around to act like they’re not tech dinosaurs. Clearly it has to mean more than just the cloud craze alone.

In my opinion, it’s because Workday is small and focused on a specific segment of the cloud — business payroll software and HR management tools. It’s a great market, and it’s a business  Workday does this well, even if it’s a small and specialized channel.

This laser-like focus is the key.

Obviously there’s something to be said for being on top of the tech space with a dominant and diversified line of products. But small has its advantages. Generally, the big players like Oracle (NASDAQ:ORCL) don’t move as fast because of this scale, and that allows  smaller upstart like Workday to pick a segment and really start chipping away at it. They’ll never topple the entire Oracle kingdom, but they can certainly claim a small and profitable piece of real estate for themselves.

There’s also the specific benefit of a large market for payroll and HR software, since it’s a necessity for any legitimate business. So the Workday IPO was well received since the company is in the  enviable position of focusing on a stable industry that is insulated from economic cycles or spending whims, more than a segment like consumer tech.

Another bonus: Corporations are flush with cash these days but still concerned with keeping costs down and winning efficiencies instead of ramping up hiring. Workday’s easy-to-use services are in perfect alignment with making a company more productive, so it’s a an easy sell to companies these days — unlike a big IT purchase plan.

There are other important reasons to like the Workday IPO. Businessweek noted that it “has replaced Oracle and SAP AG (SAP) at businesses including Flextronics (NASDAQ:FLEX), Kimberly-Clark (NYSE:KMB), Sun Life Financial (NYSE:SLF) and Lenovo Group (PINK:LNVGY).” There are also reports that Google (NASDAQ:GOOG) ditched a home-grown HR system in favor of Workday. That proves big clients already on board, legitimizing this company before it hit the market … unlike firms that hope to hit their stride after the IPO.

Workday also has the pedigree of co-founder David Duffield, who knows this channel well. In fact Oracle used what he calls a “bitter and highly unusual” hostile takeover in 2005 to snatch up his previous company, Peoplesoft. So he not only knows the enterprise software business, he has a personal reason to stick it to ORCL and Larry Ellison by succeeding at Workday.

Web-based email and remote access to files is nice, and the consumer market for things like Apple (NASDAQ:AAPL) iCloud and Amazon (NASDAQ:AMZN) cloud storage for media get a lot of attention.

But if you really want to know what gets investors excited, it’s a small, focused tech stock that has its sights on a very lucrative market with a very realistic plan to snatch up business.

These could be the best stocks to own going forward as entrenched giants like Microsoft, Oracle and maybe even Apple and Amazon find their wide array of tech services being disrupted by upstart competitors.

There’s risk in stocks like this, obviously. But as Workday’s IPO is indicating there is also big reward for those who seem to get it right.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he owned a position in Apple but no other stocks named here.

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