Workday Upgraded, Time to Buy?

After putting in what looks like a decent double bottom in recent weeks, shares of Workday NASDAQ: WDAY were up almost 40% off the lows by the close of Tuesday’s session. Like many other tech and non-tech names out there, they had a rough Q1 and their shares fell close to 50% before catching a bid. In the clamor to get back into equities over the past fortnight as the Fed stepped in, they’ve rallied hard and investors are surely sleeping a little easier.

Workday is a Silicon Valley-based company and provides a SaaS platform for HR and employee management. As the coronavirus pandemic breeds economic uncertainty and reduced spending, the knock-on effects are obvious. There are more layoffs, less hiring and certainly less purchasing of new employee management tools. That being said, it looks like the recent sell-off might have been overdone for Workday as they were upgraded on Tuesday by Morgan Stanley who also increased their price target.

Long Term Opportunity

Analyst Keith Weiss focused on the long term opportunity given the recent haircut and in particular, drew attention to Workday’s total addressable market which is substantial and can only increase as the economy recovers. He sees them as a ‘long term SaaS winner’ which will surely keep the bulls pressing the bid on any further dips and added: "we continue to be enamored by the large market opportunity Workday addresses and the best-in-class retention rates seen in their enterprise-focused subscription revenue base."

The company’s last earnings report at the end of February showed a well-oiled machine ticking over nicely, with earnings and revenue topping analyst expectations. The latter was up 24% year on year, subscription revenue was up 25% year on year and operating cash flows were up 43% year on year. All impressive double-digit numbers for a $30 billion company to take into a surprise economic slowdown such as the one we’re dealing with currently.

It will be a few weeks yet before we get their Q1 earnings and that’s when the real damage from coronavirus will be seen. For now, we only have analyst estimates to work off. Towards the end of March, JPM took a bearish stance and slashed its price target by 10% while also cutting Q1 earnings estimates by 20%. One of their enterprise SaaS peers, Salesforce NYSE: CRM was also brought down in the same report. There’s no doubt that some tangible damage will be done to the numbers but with close to $2 billion in cash, Workday can afford to hunker down through a slowdown and live off the recurring subscription revenues.

Considering a Position

In terms of stock performance against their peers in the year prior to 2020, Workday’s shares were lagging significantly to Salesforce’s and ServiceNow’s NYSE: NOW, another enterprise planning solution. Oracle NYSE: ORCL, probably one of their more direct competitors, was also outperforming them prior to the current sell-off. Still, irrational and inefficient things happen during times of volatility and at these levels, it looks like Workday is trading cheap compared to where it could be or at least where it was, given the growth potential it has in the future.

Investors getting involved should consider the $111 to $115 range as the first line of support on any further dips and a decent place to work entry. There were strong bids here from the bulls who weren’t letting it fall any further. At those prices, investors would be getting the stock for 2017’s levels, which feels like a bargain considering the recent Q4 report was the company’s best ever.