2023-06-14 05:31:59 ET
Summary
- Workday is an attractively priced stock that's often overlooked by investors, despite its integration into the IT stack.
- The company offers cloud-based solutions for finance and human resources, with stable revenue growth rates and a user-friendly interface.
- WDAY is on track to achieve GAAP profitability soon and has a growing subscription backlog, indicating a strong pipeline of future business.
- Although stock-based compensation is a concern, Workday is close to breakeven on a GAAP basis and shows potential for profitable growth.
Investment Thesis
I contend that Workday ( WDAY ) is an attractively priced stock that's integrated into the IT stack. I make the argument that there's a lot to like here. That this business is flying under the radar of many investors.
Here, I describe what Workday does. How its revenue growth rates are stable and healthy. And that the business is likely to be on the cusp of reaching GAAP profitability next year.
Also, I discuss its valuation. Here's the punchline. You'd do well to consider this name.
Why Workday? Why Now?
Workday is an enterprise software company with two main platforms, human capital management ("HCM") and financial management. But there's a lot more that Workday does, as the figure below highlights.
Workday is a provider of enterprise cloud applications for finance and human resources. They offer SaaS solutions for human capital management and financial management.
One of its top features is its user-friendly interface. Workday's HCM suite includes tools for managing HR processes such as employee data and payroll and benefits administration.
Meanwhile, Workday's Financial Management enables organizations, primarily large enterprises, to manage financial processes efficiently. This includes managing the general ledger and expense management.
Recent comments from Workday's CEO Aneel Bhusri get to the heart of what is seeking to accomplish:
Another important innovation focus area for us is to be more open and connected. Whether that's by providing an open and extensible platform or by working closely with our partners to deliver added value to our customers.
The combination of being open and innovative, are two areas that Workday declares will lead to sustainable growth prospects. Here's another quote from the earnings call that highlights growth opportunities for Workday:
Global growth continues to be a massive untapped opportunity for us. We drove strong execution across a number of our major geographies this quarter, yet less than 5% of our TAM is penetrated.
Fundamentally, Workday argues that a company's top assets are people and money and by providing an industry-first approach, Workday's customer satisfaction ratings can remain very high.
Furthermore, arguably the best insight that Workday is continuing to perform well is that its subscription backlog was up 23% y/y in fiscal Q1 2024. As long the backlog subscription remains in line or above with its revenue growth rates, this implies that there's still a healthy pipeline of business in the next several quarters.
What's more, during the Q&A section of the call this is what Workday's management said:
[...] as it relates to the net new business, as you can see, we had a really strong start to the year here in Q1, and that includes our net new business or our new ACV business [Annual Contract Value].
And it was across all industries. [...] So our net new business is the lifeline of Workday. It gives us the customer installed base to sell back into.
Simply said, the business is ticking along and expanding at a rewarding rate. Something that we'll turn out focus towards.
Revenue Growth Rates Like To Stabilize
Many SaaS businesses have seen a significant slowdown in their near-term outlooks. For instance, take Salesforce ( CRM ), Snowflake ( SNOW ), and SentinelOne ( S ).
The message coming out of this earnings season is that there's been too much software adoption in the post-pandemic period and companies are now digesting their software.
All that being said, as you can see above, Workday continues to move forward at a steady clip largely unhindered.
Essentially, I believe that Workday is able to continue moving forward and growing its revenues in the very high teens. And I'm not convinced that investors are sufficiently paying attention to its progress.
WDAY Stock Valuation Discussed
The negative consideration when it comes to Workday is that approximately 23% of its revenues go out the door as stock-based compensation. That being said, consider this:
Workday today is very close to breakeven on a GAAP basis.
Furthermore, given that Workday guides for 23% non-GAAP operating margins for this fiscal year, fiscal 2024, this means that it's very likely that next fiscal year, Workday will be GAAP profitable; albeit only marginally.
Next, the graphic above is a reminder that Workday's valuation has compressed, as has the valuation of most tech stocks -- outside of AI-related stocks, at least.
But what stands before us is a business that's nearly growing at 20% CAGR and on the cusp of being GAAP profitable, and with a more attractive valuation than it's had for a while.
In fact, if you think about it, Workday has more than 3 years under its belt growing at or close to 20% CAGR, and yet the multiple has continued compressing, in my opinion, unjustifiably.
The Bottom Line
I believe that Workday is a promising investment opportunity that many investors have overlooked.
This enterprise software company offers cloud-based solutions for finance and human resources, with a user-friendly interface and a focus on openness and innovation.
Workday's revenue growth rates have remained stable and healthy, positioning the company to achieve GAAP profitability in the near future.
I find it encouraging that Workday's subscription backlog is growing, indicating a strong pipeline of future business. Despite a slowdown in the software industry, Workday has maintained steady growth rates.
The one blemish here is that stock-based compensation is a concern. However, Workday is close to breakeven on a GAAP basis and is expected to become GAAP profitable next fiscal year.
Finally, the valuation of Workday has become more attractive, considering its consistent growth and improved financial performance. Overall, I believe that Workday presents a compelling investment opportunity that deserves closer attention.
For further details see:
Workday: Steady Growth, Profitability Beckons, Very Attractive Price