3 Reasons Workday Stock Is Setting Up For A New Rally

Key Points

• Workday has shown strong returns over various timeframes, indicating institutional support and a bullish trend.
• Analysts expect substantial earnings growth for Workday in fiscal 2024, boosting investor sentiment.
• Workday embeds AI and machine learning into its software. 

As the saying goes, success leaves clues. Workday Inc. NASDAQ: WDAY is leaving a trail of breadcrumbs likely to lead investors to higher returns. 

The stock climbed 5.38% on August 25, after the company reported better-than-expected quarterly results, as you can see using MarketBeat’s Workday earnings data.

Workday specializes in enterprise cloud applications for finance and human resources. It counts more than 10,000 organizations of all sizes as customers for its software-as-a-service offerings.

Workday embeds AI and machine learning into the core of its platform, which improves efficiencies for customers, and drives faster data-driven, decision-making.

Here are three reasons why the stock looks especially strong: 

Bullish Chart Setup

Workday stock has posted the following returns:

• 1 month: 4.21%
• 3 months: 20.65%
• Year-to-date: 41.62%

That’s significant, as the best stock rallies typically occur in a stock that’s previously staged a strong uptrend. That indicates existing institutional support, which is a necessary element in a big price move.

Take a look at the Workday chart: The stock has been holding above its 50-day moving average since mid-May, just before gapping higher on its previous quarterly report. 

Workday stock rallied to a high of $240.16 on August 1, then pulled back, continuing to find 50-day support. That level is important, as it shows that investors were simply taking some profits after a strong run-up, but not running for the exits. 

Notably, Workday stock performed better than the broader markets since early August.

At this juncture, that high of $240.16 represents a potential buy point. Shares closed at $236.97 on August 25, just 1.3% below that prior high. It would only take a little more post-earnings follow-up buying to help the stock surpass that point.  

Also, watch for heavy-volume buying, which is a sign of investor conviction. Trading volume on August 25 met that criteria, coming in 206% higher than normal. 

Strong Earnings Estimates

Wall Street expects Workday to earn $5.57 a share this year, which is fiscal 2024. That would be a very healthy increase of 53%. 

Next year, that’s seen rising by another 18% to $6.56 per share.

Strong earnings estimates are vital for a stock as they indicate investor and analyst sentiment regarding the company's potential profitability and financial health. 

In addition, strong estimates attract additional investment, which sends share prices higher. 

One caveat: If the broader market is in a correction, even the best stocks can be dragged lower, but in a bull market, stocks with good earnings estimates have an advantage.

Workday has already shown that it can bring the goods: Its three-year earnings growth rate is 18%, and its three-year revenue growth rate is 18%. 

Earnings growth accelerated in the past two quarters, also a good sign. That occurred as revenue growth decelerated ever-so-slightly, from 20% to 16%, but the increase on the bottom line shows the company is operating efficiently and managing costs. 

Healthy Margins 

Efficiency is an important element in a company’s profitability, and that’s clearly a focus at the company. 

Workday’s gross profit margin over the past five years is 71.72%.

Gross profit margin is crucial because it reflects a company's efficiency in managing the costs of what it produces. In Workday’s case, that’s the cost of developing, marketing, and selling its software. 

A higher margin indicates good cost control, as well as pricing power over industry rivals. 

In its recent earnings report, Workday emphasized its operating margin, which measures a company's profitability by showing the percentage of revenue that remains after covering operating expenses, excluding interest and taxes.

That’s a mouthful, but it’s a key metric that companies and analysts use to evaluate a company’s profits. 

The company raised its fiscal 2024 non-GAAP operating margin guidance to 23.5%.

The non-GAAP format is an accounting method that can provide a clearer picture of a company's operational performance by excluding any non-recurring or unusual items from financial statements. 

“We plan on maintaining a disciplined approach of investing in long-term growth while expanding margins,” said chief financial officer Zane Rowe, in the earnings statement.