Should You Buy the Dip in Workday?

The demand for Workday’s (WDAY) cloud application is likely to increase in the upcoming months as the second wave of coronavirus further accelerates the current digital transformation. This could lead to a substantial increase in earnings and revenue for the company. Hence, the recent dip in price may be a good buying opportunity.

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Workday, Inc. (WDAY) offers cloud-based financial management and human capital management services worldwide. It provides business planning and analytics solutions that enable customers to bring together various data with analytics tools and make business decisions.

The cloud software maker has secured 1,000 customers for its financial applications. Although its sales slowed down during the critical months of the pandemic, they gained momentum in the previous quarter. The company witnessed a surge in software sales, suggesting that more businesses are  buying its accounting, business planning and cloud-based products.

The stock has gained 36.7% year-to-date. This impressive performance combined with several other factors has helped WDAY earn a “Buy” rating in our proprietary rating system. Here’s how our proprietary POWR Ratings system evaluates WDAY:   

Trade Grade: A

WDAY is currently trading above its 50-day and 200-day moving averages of $219.34 and $184.23, respectively, indicating that the stock is in an uptrend. Also, the stock gained 7% over the past month, reflecting short-term bullishness.

WDAY’s revenue increased 17.9% year-over-year to $1.11 billion in the fiscal third quarter ended October 2020. The increase was primarily attributable to the rise in subscription revenue. Operating cash flow grew 13.9% from the year-ago value to $293.80 million, while non-GAAP operating income rose 88% from the prior-year quarter to $268.10 million.

WDAY recently announced the availability of Workday Accounting Center and machine learning driven predictive forecasts for Workday Adaptive Planning. This is expected to transform the way customers engage with data. In addition, it introduced Workday Talent Marketplace, which delivers skills-based talent matching, connecting people with relevant work and growth opportunities. These developments will allow the company to provide its cloud planning and financial management solutions to a wide range of customers, and thereby, accelerate its business growth.

Buy & Hold Grade: B

In terms of proximity to its 52-week high, which is a key factor that our Buy & Hold Grade takes into account, WDAY is well positioned. The stock is currently trading just 9.3% below its 52-week high of $248.75, which it hit on August 28th.

The company’s net revenue grew at a CAGR of 27.7% over the past three years. This can be attributed to growing momentum in financial management, cloud services and AI solutions over the past couple of years.

Peer Grade: C

WDAY is currently ranked #27 out of 96 stocks in the Software – Application industry. Other popular stocks in this industry are Paycom Software, Inc. (PAYC), QAD, Inc. (QADA) and Oracle Corporation (ORCL).

While PAYC beat WDAY by gaining 57.5% year-to-date, QAD and ORCL returned 12.6% and 9%, respectively, over this period.

Industry Rank: B

The Software – Application industry is ranked #28 out of the 123 industries. The companies in this industry design and publish software for business support and development.

A major factor driving the growth of the cloud computing industry is enterprises’ need to support more remote working. This should lead to higher investment in IT infrastructure for cloud service providers and internet service providers over the next couple of months.

Overall POWR Rating: B (Buy)

WDAY is rated “Buy” due to its impressive financials, short- and long-term bullishness, solid price momentum and underlying industry strength, as determined by the four components of our overall POWR Rating.

Bottom Line

WDAY is well positioned to soar in the upcoming months despite gaining 36.7% year-to-date. With many countries experiencing a second wave of coronavirus infections, the need for digital transformation has accelerated the demand for cloud solutions and AI services.

Analyst sentiment, which gives a good sense of a stock’s future price movement, is pretty impressive for WDAY. It has an average broker rating of 1.52, indicating favorable analyst sentiment. Out of 30 Wall Street analysts that rated the stock, 17 rated it a “Strong Buy.” The consensus EPS estimate of $0.57 for the next quarter ending April 2021 represents a 29.5% improvement year-over-year. Moreover, WDAY has an impressive earnings surprise history, with the company beating consensus EPS estimates in three out of trailing four quarters. The consensus revenue estimate of $1.16 billion for the next quarter represents a 16.2% increase from the same period last year. So, the stock offers an attractive entry point with the recent price decline.

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WDAY shares were trading at $225.43 per share on Wednesday afternoon, down $0.27 (-0.12%). Year-to-date, WDAY has gained 37.08%, versus a 15.60% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.


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