With a $71.08 billion market capitalization, Workday, Inc. (WDAY), which is headquartered in Pleasanton, Calif., is a leading enterprise cloud applications provider. The company has benefited substantially from the work-from-home trend over the past year. WDAY beat analyst estimates in each of the trailing four quarters.
For its fiscal third quarter ended October 31, 2021, WDAY’s revenues increased 20% year-over-year to $1.33 billion. This can be attributed to a 21% rise in subscription revenues. Its non-GAAP operating income rose 23.9% from the same period last year to $332.20 million. Its non-GAAP EPS came in at $1.10, up 27.9% from the prior-year quarter. And the company topped the Street’s EPS estimates by 27.9%.
However, the stock has declined 4.2% in price since its third-quarter earnings release on November 19, due to speculation surrounding its acquisition of VNDLY for $510 million. However, the acquisition is expected to boost WDAY’s business strength, given VNDLY’s expertise in cloud-based external workforce and vendor management technology. Also, WDAY will gain direct access to VNDLY’s Fortune 500 clients through the business combination.
Here is what could drive WDAY’s performance in the coming months:
Ample Recognition in the Industry
WDAY was named a Leader in the 2021 Gartner Magic Quadrant for Cloud HCM Suites for 1,000+ Employee Enterprises in 2021 for the sixth consecutive year. Also, the company secured a top rank for overall Ability to Execute.
WDAY Financial Management also received the Gartner Peer Insight Customers’ Choice 2021 Distinction for products in Cloud Core Financial Management Suites for Midsize, Large, and Global Enterprises. Positive feedback and ratings from end-user professionals allowed WDAY to secure this award.
Earnings Guidance Upgrade
Following impressive third-quarter results, WDAY’s management increased its earnings guidance for its fiscal year 2022 (ending December 2021). The company’s subscription revenue is expected to range from $4.53 billion – $4.54 billion, reflecting a 20% improvement. Its subscription revenues for the fourth quarter are expected to range between $1.216 billion and $1.218 billion, reflecting a 21% increase from the same period last year. Also, management expects the company’s non-GAAP operating margin to stand at 22%.
Favorable Analyst Expectations
Analysts are recommending investors “buy the dip,” considering the company’s tremendous growth potential. Wells Fargo raised its price target for WDAY stock to $325 from $320 following the earnings report release, indicating a 13.4% potential upside. Barclays has increased its price target for the stock to $345 from $340, reflecting a 20.4% potential upside.
Needham has raised its price target to $360 from $310, representing a 25.6% upside. And Piper Sandler raised its price target for WDAY stock to $360 from $295, while Keybanc raised it to $345 from $315.
POWR Ratings Reflect Rosy Prospects
WDAY has an overall B rating, which equates to Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.
The stock has a grade of A for Growth and a B for Quality. WDAY’s revenues have increased at a 27.4% CAGR over the past five years, justifying the Growth grade. In addition, the company’s 72.98% trailing-12-month gross profit margin is 46.7% higher than the 49.76% industry average, which is in sync with the Quality grade. Of the 166 stocks in the Software – Application industry, WDAY is ranked #18.
In addition to the grades I have highlighted, you can view WDAY ratings for Sentiment, Momentum, Value, and Stability here.
With robust tech integration in virtually all industries and the continued adoption of hybrid working models, enterprise software demand is expected to rise steadily. As a leading player in this space, WDAY has been taking active steps to boost its market share through multiple acquisitions. Thus, we think its recent price dip could be an attractive investment opportunity.
How Does Workday (WDAY) Stack Up Against its Peers?
While WDAY has a B rating in our proprietary rating system, one might want to consider taking a look at its industry peers, Open Text Corporation (OTEX), American Software Inc. (AMSWA), and Oracle Corporation (ORCL), which have an A (Strong Buy) rating.
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WDAY shares were trading at $279.20 per share on Monday afternoon, down $7.40 (-2.58%). Year-to-date, WDAY has gained 16.52%, versus a 27.06% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditi Ganguly
Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...
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