Workday, Inc. (NASDAQ: WDAY) is a market leader in cloud-based finance and human capital management software that enables organizations to manage their resources more efficiently. As of this writing, Workday’s services are used by over 9,500 organizations in 32 countries and by more than half of the Fortune 500, improved from over 8,500 organizations last fiscal year.
The company manages to improve their employee count to 15,200, despite the global labor shortage which helps them with servicing their growing 60 million users. WDAY enjoys a strong fiscal 2023 outlook from the management, which expects a continued growth in its subscription revenue and relatively higher Non-GAAP operating margin compared to its pre-pandemic level. Despite challenges in Covid-19 and a high inflation environment enhanced by the Russia and Ukraine conflict, the management retained a flat guidance on its operating cash flow and in my opinion is on track to provide investors another positive bottom line next fiscal year. Its current focus on business expansion and product development will help the company to cater its growing demand. WDAY maintains a liquid balance sheet and enjoys a growing EPS forecast, making it a good candidate for a long opportunity.
Stronger Growth Than Its Peers
WDAY posted a slowing revenue growth trend which becomes a concern to many, including myself.
However, when compared to its major peers, such as JUICE (NYSE: SAP) and Oracle Corporation (NYSE: ORCL), I believe WDAY posted a strong growth rate in comparison to both its challenging pandemic-related figures and its peers.
On Track to Its $ 10 Billion
WDAY also enjoys a sustained demand environment and according to the management, the company is well positioned to capitalize on the growing demand of its finance solutions. Additionally, the management provided a significant increase in customer base in financial services, giving the company a competitive edge over its competitors.
Industry-specific investments such as Accounting Center, along with our deep industry knowledge and our rapidly expanding reference base of customers, which now includes more than 70% of the financial services companies in the Fortune 500, are all key to our success. And it’s not just the innovation we are driving that is enabling our success, but also that of our partners, such as PwC, who created a solution for multidimensional part planning and profitability by leveraging Workday Financials, Extend, Accounting Center, Prism and Adaptive Planning . Source: Q4 2022 Earnings Call
WDAY also enjoys a growing subscription revenue and management expects it to outperform its current 20% YoY growth rate with a projected 22% increase in revenue next fiscal year, which is expected to be between $ 5.53 billion and $ 5.55 billion. Additionally, WDAY has seen a positive increase in the number of large customers, as indicated below.
Customer base expansions in Q4 included US Bank who purchased core FINS, Accounting Center, Prism and Extend; FIS who purchased Workforce Planning, Extend and Canadian UK payroll; and Merck, BP, International and Advocate Aurora Health, who all added Extend. In Q4, we also expanded our relationship with Accenture, who is deploying Peakon to gain a real-time post on its employee base to help power its global talent strategy. As strategic partners of ours, Accenture is applying its innovation in this area to drive engagement and deep employee-related insights for our mutual customers. Source: Q4 2022 Earnings Call
In my opinion, with its growing backlog, growing subscription revenue with a net retention rate of 100% and its growing customer base, WDAY is well tracked to its long-term goal of $ 10 billion revenue.
A Conservative 23% Upside Potential
WDAY is currently trading below my average fair price of $ 292.7. I used the average of the DCF model and simple relative valuation to come up with a conservative target price. The company currently trades at a trailing P / S ratio of 11.46x and 5 year average of 12.33x. In my opinion, selecting 10.70x P / S ratio as a benchmark is still conservative. WDAY shows a cheaper trailing EV / EBITDA of 256.16x compared to its 38.49x forward multiple. Additionally, I assume an EV / EBITDA multiple of 28.30x, which is slightly less than the industry’s median of 31.22x.
To complete my DCF model, I used analysts’ consensus revenue estimates. I believe the 2023’s forecasted figure is achievable and is aligned with its forecasted subscription revenue for fiscal 2023. I estimated a positive operating income which is also aligned with the management expectation and its EBITDA consensus. In my opinion, this growth is still conservative as the management provided assurance that they are confident in reaching a 25% operating margin at $ 10 billion mark top line. Additionally, WDAY is demonstrating a positive trend in terms of OPEX efficiency relative to top line growth.
I conservatively assume a 10% tax rate rather than assuming a tax benefit, despite its past trend of negative bottom line and forecasting it to grow at 18.5% at the end of the model aligned with the company’s long term Non-GAAP effective tax rate of 19%.
Above are my assumptions and selected historical data that I used to complete my DCF model. Additionally, I used WACC as my discount rate. I also forecast ROIC for fiscal 2023, as shown in the image below.
If WDAY can materialize its strong top line projection, we might potentially see a positive ROIC of 16% higher than today’s WACC of 10.2%.
Consolidating at a Strong Support Zone
WDAY is currently consolidating in the range of $ 210 and $ 250; a break of this zone can provide a strong breakout opportunity in the coming trading weeks. Currently, it has a growing short interest rate of 4.59% which can potentially drag its price lower. If the price falls sharply below $ 200 and the company reports lower actual revenue than consensus estimates in its future earnings report, which is backed up by a downward outlook from management, investors should lower expectations for WDAY’s future potential. However, a break above $ 250 may provide WDAY a reason to challenge Street’s average target price of $ 312.39.
Final Key Takeaways
WDAY maintains a liquid balance sheet with $ 1,534.3 million cash and cash equivalents and growing cash from operations trend.
The management provided a flat forecast of $ 1.65 billion in its cash from operation in the next fiscal year, which is enough to cover its current short-term contractual obligation of $ 1,492.06 million. Its current ratio of 1.03x remains above 1.0x but below its 3 year average of 1.09x. This is due to a growing current portion of unearned revenue which contributes 61% of its total current liability.
To sum it up, WDAY enjoys positive estimates revisions despite the broader bearish market, the company has a stronger growth than its peers, it enjoys a growing top line and cash flow, and maintains liquidity status, making it a good buy at today’s weakness.
Thank you for reading and stay safe everyone!