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Summary

  • With the stock still down roughly 30% from its 52-week high, there is still upside potential here.
  • On the basis of long-term revenue growth and market share gains in SaaS and enterprise resource planning, I see these shares hitting $100 by the end of the year.
  • In what has been a brutal enterprise spending environment, the rate at which Workday continues to land multimillion-dollar deals is nothing short of remarkable.

There was a point when discussions about Workday (NYSE:WDAY) never took place without mentioning the company's "potential." It was always about "what ifs."

On Tuesday the Software-as-a-Service (NASDAQ:SAAS) giant soundly beat its first-quarter earnings estimates and projected better-than-expected guidance. In so doing, Workday demonstrates it can effectively handle the competition and manage growth.

While these shares aren't cheap at around $82 per share, risk-adverse investors that get in now can have a $100 stock in the next 6 to 12 months. If guidance was any indication, this fast-growing cloud company can still deliver strong returns of 22%.

First-quarter revenue surged 74% year over year to $159.7 million, beating Street estimates by roughly 5%, topping expectations of $152.4 million. Growth has never been a problem for this company. The issue has always been profits, which took a surprising turn for the better this quarter.

The most popular bearish argument for Workday has been that the company makes no money, especially when compared to bigger rivals like [[SAP]] and Oracle (NYSE:ORCL).

But Workday has always believed it can deliver similar-to-slightly-better services for prices that are close to 50% below what enterprises currently pay. This time, with a narrower loss of 13 cents per share (excluding items), which beat estimates of a loss of 15 cents, the aggressive undercutting didn't hurt that badly.

Equally impressive was that Workday said its billings were at $208 million, or 26% above analysts expectations of $165 million. Management said that the company "benefited from several new large customers." Billings is the metric that denotes the strength of future revenue.

In what has been a brutal enterprise spending environment, the rate at which Workday continues to land multimillion-dollar deals is nothing short of remarkable. And based on management's guidance, the company doesn't expect this trend to end any time soon.

For the August quarter, management projects revenue in the range of $173 million to $178 million, which represents a year-over-year jump of 61% to 65%. Analysts were expecting $171.5 million. In terms of earnings, although the company does not offer profit guidance, the Street expects a per-share loss (excluding items) of 14 cents, widening by a penny above last year.

But as I noted recently, profitability is not what the Street is paying for today. That said, investors have to understand what they are paying for. And the risks that come with not meeting expectations. Workday is far from a perfect company, yet the stock is priced for perfection.

The good news is that the company is seeing increased demand for its services and expertise in human capital management solution. To that end, as long as the company continues to deliver growth ahead of demand expectations, these shares should do well.

With the stock still down roughly 30% from its 52-week high, there is still upside potential here. On the basis of long-term revenue growth and market share gains in SaaS and enterprise resource planning, I see these shares hitting $100 by the end of the year.

Source: Back From Vacation, Workday Now Heading To $100