Apps & Software

Profit-Taking, Valuations and Few Catalysts Hang Over Workday's Strong Growth

Workday Inc. (NASDAQ: WDAY) reported strong earnings on Thursday after the close, and its guidance was strong as well. While that is impressive, the valuations appear to be weighing on the stock as profit-takers are deciding to take money off the table. This is a reversal of the initial reaction in Thursday’s after-hours session.

When Workday reported its results, third-quarter revenues were up almost 18% from a year ago at $1.11 billion. Its subscription revenue of $968.5 million was up 21.3% from a year ago, and the subscription revenue backlog of $8.87 billion was up 23.4% from a year ago.

The company’s growth is tied to its enterprise cloud applications for finance and human resources. While the net loss per share was $0.10, Workday’s adjusted (non-GAAP) earnings came in at $0.86 per share. The company’s operating cash flow was $293.8 million, and its cash and cash equivalents hit $2.95 billion.

Workday also raised its fiscal 2021 subscription revenue guidance up to a new range of $3.773 billion to $3.775 billion. That said, the company also noted that it is increasing its pace of investments to capitalize on the long-term opportunity.

While Workday’s stock closed up 3.2% at $230.80 ahead of earnings, the after-hours reaction was initially up about 3%. Then on Friday morning in premarket trading, it was down 3.6% at $222.40, but after about two hours of trading it was down 7% at $214.50.

Several non-earnings-related issues are weighing on the stock.

At the start of April, shares traded under $120, and they had risen up to nearly $250 by the end of the summer after posting incredibly strong results. With a $50 billion market cap, even after the 7% drop, the current valuation is about 85 times expected 2021 earnings per share and about 11.6 times expected 2021 revenues. Even with double-digit sales growth, it is a steep valuation, considering Workday came public back in 2012.

While Workday’s guidance is solid and analysts see continued growth in 2021 and beyond, Workday also noted that the pandemic likely will hurt software demand in 2021.

The analyst community has not jumped all over Workday with upgrades, and the prior highs basically were close to the $247.73 Refinitiv consensus analyst target price. Here are some of the analyst calls seen as of Friday morning.

Piper Sandler reiterated it as Overweight and raised its price target to $285 from $275. That firm had upgraded its rating from Neutral on October 20.

Credit Suisse maintained its Neutral rating but still raised its target to $230 from $215.

Loop Capital maintained its Sell rating, but it still raised its target to $180 from $170.

BMO Capital Markets maintained its Market Perform rating but trimmed its target to $260 from $265.

Mizuho maintained its Buy rating and $270 price target, but the firm did note that it has cautious optimism as COVID-19 headwinds remain in its report. That said, the firm did note that Workday remains in a strong position to become the preeminent vendor in the back-office suite over the long-term story.

Canaccord Genuity has reiterated its Buy rating and a $265 target, telling its clients to buy the weakness.

Just two days before earnings, Oppenheimer initiated coverage with a Buy rating and a $265 price target.

One last issue is that Workday’s short interest remains high. Some 7.16 million shares were sold short at the end of October, with a 5.3 days to cover ratio. The prior three short interest reports averaged closer to 6.6 million shares, and this latest figure was the highest short interest since the 7.65 million shares short in mid-August.