Workday Gets Worked Over By The Analysts

Workday Falls Flat On Slowing Growth, Delayed Deals 

Workday (NASDAQ: WDAY) is yet another example of a solid yet high-flying company getting its target reeled in. the company did not produce a bad quarter but the Q1 results and outlook suggest the company’s growth and earnings are more than priced in. The most obvious evidence in favor of this outlook is the analysts who’ve been dialing back their targets and putting pressure on the stock price. 

To be fair, the 30 analysts covering Workday still have it pegged at a firm Buy. The consensus rating has been steady over the last year but the Marketbeat.com price target has not. There have been at least 22 commentaries released since the Q1 results were announced and every single one of them came with a price target reduction. The range of targets is wide but averages out to less than the broad consensus of $253.27. That target is still about 60% above the price action but down 20% in the last three months and 17% in the last 30 days alone. Based on the outlook for economic activity in the second half, it is possible these targets will get lowered again. The takeaway from the report is that backlog growth is slowing and deals are getting delayed which are conditions we see worsening in the face of inflation and higher interest rates. 

Workday Reports Mixed Quarter 

Workday had a good quarter of that there is no doubt. The company produced $1.43 billion in revenue for a gain of 21.2% but there is a problem with the comparisons. The analysts were expecting about $1.43 billion in revenue so there is no catalyst for higher share prices in the news. The gain was driven by a 23.2% increase in subscription revenue which was also as expected and the news doesn’t get any better further down the report. Investment in operations, as well as inflationary pressures, cut into the operating margin by 440 basis points. This was more than expected and left the adjusted earnings below expectations and worse, down on a YOY basis despite the top-line growth. 

The factor that caught the analyst's attention, however, is the backlog growth rate. The 2-year subscription backlog rose 20.9% on a YOY basis which is strong but down more than 400 basis points relative to total backlog growth. This suggests slowing growth in a highly-valued company which is a catalyst for price correction if anything.

Insiders And Institutions Are Selling Workday 

The insiders and institutions still hold quite a bit of Workday stock but the trend in ownership is decidedly bearish. The insiders and major shareholders hold about 21.75% of the stock while the institutions (including major shareholders) control more than 70% and both groups are selling. Together, the insiders and institutions have sold an amount worth about 25% of the current market cap and we don’t see the trend ending without some change to the outlook. As it is, price action in the stock is at the lowest levels since the pandemic bottom and they could head lower. 

Turning to the chart, price action is showing signs of support near $150 but the indicators are still bearish. We are expecting to see the recent low retested at least and possibly broken. If the price action moves below $150 a move down into the $120 to $140 range is expected. If, however, support is confirmed at $150 we expect to see a new trading range established.