2023-10-22 21:28:44 ET
Summary
- Workday is a leading provider of enterprise cloud applications for finance and human resources, known for user-friendly design and real-time insights.
- The company has shown consistent revenue growth, with a compound annual growth rate of approximately 15.5% over the past three years.
- Workday's strong financial performance, deep market penetration, and strategic initiatives position it as a leader in the enterprise software space. However, its current stock price indicates limited potential for capital gains.
Summary
Workday, Inc. ( WDAY ) is a leading provider of enterprise cloud applications for finance and human resources. The company delivers financial management, human capital management, and analytics applications designed for the world's largest organizations, educational institutions, and government agencies. WDAY's applications are known for their user-friendly design, providing real-time insights, and enabling businesses to adapt to changing needs. The company's solutions are cloud-based, ensuring scalability and flexibility for its clients. With a strong emphasis on innovation and customer satisfaction, WDAY has positioned itself as a key player in the enterprise software space, helping organizations drive digital transformation and streamline their operations.
WDAY stands out as a formidable player in the enterprise software space, driven by its impressive second-quarter financial performance and deep market penetration across key sectors. With a strategic shift towards integrated platforms, WDAY is meeting the evolving needs of businesses by offering consolidated solutions that streamline operations. The company's platform, trusted by millions of users, underscores its scalability and the pivotal role it plays in organizations. As WDAY continues to innovate and prioritize customer needs, it solidifies its leadership position, making it a noteworthy consideration for investors. While WDAY showcases a bright outlook, its current stock price indicates limited potential for capital gains when compared to my target price. Hence, my recommendation for WDAY is a hold rating.
Over the past three years, WDAY has showcased a commendable trajectory in its revenue growth. In fiscal year 2021, the company reported a total revenue of $4.318 billion. This figure surged by approximately 19% in Fiscal Year 2022, reaching $5.139 billion. The upward momentum was sustained into Fiscal Year 2023, with the revenue further climbing to $6.216 billion, marking a year-over-year growth of about 21%. Analyzing this three-year span, WDAY’s revenue exhibited a compound annual growth rate of roughly 15.5%. Such consistent and robust growth patterns underscore WDAY’s solid market position, reflecting its capability to continually expand its customer base and enhance its service offerings.
Investment thesis
In the recent earnings call, WDAY reported strong financial performance for the second quarter. Subscription revenue reached $ 1.62 billion , marking a notable 19% increase from the previous year. Additionally, the professional services segment contributed $ 163 million , bringing the total revenue for the quarter to $ 1.79 billion , a growth of 16% year-over-year. When breaking down the revenue geographically, $442 million was generated outside the U.S., which accounts for 25% of the total revenue and showcases a 15% growth for the quarter. From an operational standpoint, the non-GAAP operating income stood at $421 million, translating to a non-GAAP operating margin of 23.6%. Furthermore, the operating cash flow for the quarter was reported at $425 million.
In the retail and hospitality sector, WDAY achieved a significant milestone by joining the financial services sector, surpassing $1 billion in annual recurring revenue. This accomplishment not only indicates strong adoption of WDAY's solutions within these industries but also suggests that WDAY has successfully penetrated key players within the retail and hospitality sectors. As these industries continuously evolve, especially in the digital age, I anticipate it will drive WDAY's growth as businesses seek integrated solutions to manage their operations efficiently.
The health care sector saw robust performance, with three major hospital systems adopting WDAY's platform in the second quarter. This adoption underscores the platform's capabilities in addressing the intricate needs of healthcare institutions. Healthcare organizations require comprehensive systems to manage their vast human resources, finances, and supply chains. WDAY's traction in this sector indicates its ability to offer solutions that cater to these complex requirements, potentially outperforming competitors in delivering value-driven solutions tailored for the healthcare sector.
Furthermore, WDAY marked a strong second quarter in the education sector, establishing partnerships with various universities . This suggests that WDAY's platform aligns well with the unique administrative, financial, and human resource needs of academic institutions. Additionally, the mention of the government sector indicates that WDAY might be expanding its reach into public sector institutions, which come with their own set of intricate operational needs.
WDAY is strategically positioning itself in the evolving landscape of business solutions. As many organizations transition from using a collection of best-of-breed solutions—where they select the best software for each specific task—to a more consolidated platform approach, WDAY is emerging as a preferred choice. This shift towards integrated platforms is driven by the desire for streamlined operations, reduced complexities, and enhanced interoperability between different business functions.
WDAY's platform offers a holistic solution that caters to various business needs under one umbrella, eliminating the challenges of managing multiple disparate systems. This integrated approach not only simplifies processes but also offers better data consistency, an improved user experience, and potential cost savings.
Furthermore, the company's value proposition in the market is becoming increasingly compelling. WDAY's commitment to innovation, customer-centricity, and continuous improvement ensures that its offerings remain relevant, efficient, and in line with the evolving needs of businesses. As a result, the company is not just providing software solutions but is also delivering tangible business value, which resonates strongly with potential clients and existing customers alike. This growing recognition and trust in the market further solidify WDAY's position as a leader in the enterprise software space.
As a result, WDAY's platform has experienced significant adoption, boasting over 65 million users under contract. This vast user base is a testament to the platform's widespread acceptance, scalability, and adeptness at efficiently catering to a large audience. Beyond just being supplementary tools, WDAY's solutions hold mission-critical status for organizations. This highlights the heavy reliance businesses place on WDAY for their essential operations, further emphasizing the platform's reliability and indispensability. A pivotal aspect of this trust is WDAY's responsibility in managing two of the most crucial assets for any organization: their human resources and finances. Any errors or inefficiencies in these domains can lead to substantial repercussions, underscoring the immense trust businesses place in WDAY. This trust isn't merely incidental. It's foundational to WDAY's ethos and is deeply embedded in their customer relationships. The company places a strong emphasis on building and maintaining this trust, ensuring their services are not only reliable and secure but also consistently meet client expectations.
Valuation
The target price for WDAY based on my following model is approximately $202. The growth rate for 2023 aligns with the guidance provided by the management during their earnings call, while the 2024 projection is consistent with market consensus. This valuation is anchored by a series of compelling assumptions derived from WDAY's recent performance and strategic initiatives. The company's latest financial results are a testament to its strength, with WDAY reporting impressive double-digit growth rates. Such robust figures not only highlight its operational efficiency but also its adeptness at capitalizing on market opportunities.
Further reinforcing this optimistic outlook is WDAY's significant expansion into pivotal sectors. In the retail and hospitality realm, achieving over $1 billion in annual recurring revenue showcases its ability to offer specialized solutions that resonate with the unique challenges of these industries. The healthcare sector's embrace of WDAY, evidenced by three major hospital systems adopting its platform within a single quarter, underscores its proficiency in meeting the complex demands of healthcare institutions. Additionally, the growing collaborations with academic entities emphasize WDAY's alignment with the distinct administrative and financial imperatives of the education sector.
A standout aspect of WDAY's strategy is its emphasis on integrated platforms. As businesses globally pivot towards unified solutions and away from isolated best-of-breed tools, WDAY's holistic approach is gaining significant traction. This strategy, which promises streamlined operations, consistent data handling, and a cohesive user experience, is positioning WDAY as a top choice for businesses in search of comprehensive solutions.
All these elements, when combined with WDAY's unwavering commitment to innovation, customer satisfaction, and continuous evolution, solidify its leadership position in the enterprise software landscape. The amalgamation of robust financial performance, strategic growth across sectors, and a successful platform-centric approach provides a strong foundation for the assumptions in my model.
Peers include ServiceNow ( NOW ). NOW's forward revenue multiple stands at 12.55x, with an expected next twelve months [NTM] growth rate of 22%, an EBITDA margin of 12.40%, and a forward EBITDA growth of 22.3%. In comparison, WDAY's metrics are as follows: a forward revenue multiple of 6.47x, an expected NTM growth rate of 18%, an EBITDA margin of 3.35%, and a forward EBITDA growth of 17%. WDAY's relatively weaker metrics compared to its peers explain its lower forward revenue multiple.
My valuation pegs WDAY's price target at approximately $201.6, which is roughly 5% below its current trading price. Consequently, I recommend a hold rating for WDAY. While the company presents a promising outlook, its current share price appears less enticing. However, should WDAY enhance its profitability metrics, drawing them closer to NOW, I foresee an expansion in its forward revenue multiple, leading to an upward revision in its target share price.
Risk
A potential risk to my hold rating for WDAY is the possibility that its growth over the next two years might surpass both management's and the market's expectations. At present, the anticipated growth for WDAY in the upcoming two years is projected to be less than the 21% achieved in 2023. However, if WDAY manages to reach this growth level, it would align with NOW's growth rate of 22%.
In such a scenario, WDAY's forward revenue multiple, which currently stands at approximately 6.4x, could see an expansion, moving closer to NOW's 12.55x. As of now, WDAY trades at a 49% discount compared to NOW. If I assume a more conservative discount of 40%, this will translate to a forward revenue multiple of 7.53x for WDAY. This adjustment could suggest an upside potential of 11% for the stock.
Conclusion
WDAY has showcased robust financial performance, with significant growth in subscription and professional services revenues. The company's deep penetration into sectors like retail and hospitality, health care, and education, combined with its strategic shift towards integrated platforms, positions it as a preferred choice for businesses seeking consolidated solutions. WDAY's platform, adopted by over 65 million users, emphasizes its scalability and the trust businesses place in its mission-critical solutions. The company's commitment to innovation, customer-centricity, and continuous improvement, coupled with its ability to manage crucial organizational assets like human resources and finances, cements its leadership in the enterprise software space. In essence, WDAY's strong market position, strategic initiatives, and growing trust among its clientele make it a compelling investment consideration. Despite its compelling outlook and strong performance, WDAY's current share price aligns closely with my target price, offering limited potential for capital appreciation. Consequently, I recommend a hold rating for WDAY. While it stands out in the market, when compared with its peers, there's evident room for enhancement in its profitability and growth metrics.
For further details see:
Workday: Stellar Growth And Prospects But Eclipsed By High Valuation