Workday has been treading water for the past six months, holding steady at $163.56. The stock also fell short of the S&P 500’s 11.7% gain during that period.
Is now the time to buy Workday, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is Workday Not Exciting?
We’re sitting this one out for now. Here are three reasons you should be careful with WDAY, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
Reviewing a company’s long-term sales performance reveals insights into its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last five years, Workday grew its sales at a 17.1% annual rate. Although this growth is acceptable on an absolute basis, it fell slightly short of our standards for the software sector, which enjoys a number of secular tailwinds.
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Workday’s revenue to rise by 10.9%, a deceleration versus its 17.1% annualized growth for the past five years. This projection is underwhelming and implies its products and services will face some demand challenges.
3. Operating Margin Rising, Profits Up
While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This metric shows how much revenue remains after accounting for all core expenses — everything from the cost of goods sold to sales and R&D.
Analyzing the trend in its profitability, Workday’s operating margin rose by 5.9 percentage points over the last two years, as its sales growth gave it operating leverage. Its operating margin for the trailing 12 months was 10.3%.
Final Judgment
Workday isn’t a terrible business, but it doesn’t pass our quality test. With its shares trailing the market in recent months, the stock trades at 4× forward price-to-sales (or $163.56 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We’re pretty confident there are superior stocks to buy right now. We’d recommend looking at our favorite semiconductor picks and shovels play.
