A Payday From Workday?
After rallying nearly 70% since the price seen on March 23, we believe Workday Inc. stock (NASDAQ: WDAY) has little upside left. The stock has rallied from $127 to $215 gaining more than the broader S&P 500 index, which moved 47%. One of the reasons for the high recovery was the Fed’s multi-billion dollar stimulus package announced on March 23rd which lifted market sentiments. Workday, which provides enterprise cloud applications for finance and human resources, has seen its stock recover to the pre-Covid peak around early July as the company benefited from the shift to Cloud due to the Covid-19 pandemic. The stock rose by 11% post Q2 2021 (ended July 2020) earnings reported on August 27th, 2020, as revenue and earnings beat the consensus estimates.
The company has seen strong revenue growth over recent years, while its P/S multiple has remained nearly flat. We believe the stock is likely to see little upside after the recent rally and the potential weakness from a recession driven by the Covid outbreak. Our dashboard What Factors Drove 84% Change in Workday Stock between FY 2018 and now? has the underlying numbers.
Some of this rise over the last two years is justified by the roughly 55% growth seen in Workday’s revenues from FY 2018 to FY 2020 (ended January 2020). The Net Income Margin has improved steadily from -15% in FY 2018 to -13.3% in FY 2020.
Workday’s P/S multiple remained nearly flat from 11.4x in FY 2018 to 11.6x in FY 2020. Additionally, this key metric is up to 13.5x now, as organizations shift to the cloud after the Covid-19 outbreak.
So what’s the likely trigger and timing for further upside?
The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. Due to a shift toward cloud migration, Workday saw a rise of 20% y-o-y in Total revenue for Q2 2021 (ended July 2020) with subscription revenues up by 23%. Operating loss improved a lot and was recorded at $16.8 million (-1.6% of revenues), compared to an operating loss of $122.5 million (-13.8% of revenues) in the same period last year.
In any case, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value.
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