Workday (NASDAQ: WDAY) Set To Be A Winner For Q4

For a while there last month, it was starting to look like Workday (NASDAQ: WDAY) was in trouble. Shares dropped close to 20% from August’s all-time high, which came about after the company reported stellar earnings. In the last week of that month, a double-digit percentage jump in year on year revenue which, along with EPS, came in ahead of expectations sent shares well above 2019’s high.

The pop coincided with both the S&P 500 index and the tech-heavy NASDAQ blowing past pre-COVID highs and as the summer’s euphoria peaked, the standard concerns about equities looking frothy appeared. There followed a decent cooling off period which was surely needed but now the markets look ready for the next leg higher. And Workday is no different.

Fresh Upgrade

Shares are trading right around last summer’s highs which is the first resistance level for them to overcome. On Thursday, Citi were out with a Buy rating and a firm belief that Workday will have no problem getting through it. They slapped a fresh $265 price target onto the stock which implies a move of more than 20% to the north from yesterday’s closing price.

Citi recently completed a survey of more than 100 enterprises and more than 70% agreed that the coronavirus pandemic was accelerating the "cloud financials transition." Workday, who are best known for their HR management platform, are well positioned to capitalize on this according to analyst Dan Jester. Jester sees cloud financials as the biggest growth opportunity in Workday’s business, despite it currently accounting for less than 20% of their revenue.

It’s a promising start to Q4 for the bulls who might have been starting to question the long thesis in the short term. The voices that urged caution when shares were bursting to all-time highs in August are still there. The more bearish among them point to shares trading at 11x forward sales which might be acceptable in the world of tech as long as topline revenue growth is accelerating. However that isn’t the case with Workday and it’s a tough pill to swallow because it’s the opposite of what many of their peers are seeing.

For reference, Workday’s revenue growth rates have dwindled from impressive 30% or higher prints last year to the mid 20s now, and management is forecasting that in 2021 they’ll continue to fall towards the mid to low teens.

Getting Involved

Still, in the context of this market and its remarkable resilience, Workday has more going for it than against it. Due to the fact that it’s enterprise-focused, it’s fairly immune from any damage to SMBs which are on the front line against a slowing economy. Furthermore, it’s cloud-based and already a market leader, so primed to continue capturing market share in what will continue to be a fast-growing total addressable market.

Investors getting involved are picking a cloud stock that knows what it’s doing and has plenty going for it. If the metrics are suggesting that shares are a little frothy at current levels, keep in mind that the market has shown us time and time again this year that it doesn’t really care right now. This is still a growth stock with plenty of catalysts ahead.

Shares have put in some decent support around the $200 mark which can be used as an entry point if there’s any further softening in the near-term. To the upside, there’s the $250 mark which was about the height of August’s post-earnings pop and is a natural target for the bulls to aim for.