Workday: The Risks And Opportunities

| About: Workday (WDAY)
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Summary

The company can under-deliver with its new applications for workplace management.

Missing potential growth targets could spell disaster for Workday.

Any security breach for the company will put it in a much weaker position against the competition.

On the positive note, the company has managed to acquire a number of large clients.

New deployment partnerships could help Workday slowly regain its previous growth levels.

Since its public offering in 2012, Workday (NYSE:WDAY) stock climbed more than 100%, from its $50 beginning to the high of $115. Workday's growth was spurred by the belief in the strength of its enterprise resource planning software, which would allow the company to achieve rapid and sustained growth. Since its highest peak, the stock nearly halved in value, and is currently trading in the $79 range. There are a number of threats and opportunities for the company, however, and of course there is no certainty as to what the future might hold for its investors.

New Apps Could Under-Deliver

So far, Workday has done exceptional job in building cloud-based enterprise resource planning software that integrates with its other offerings. Currently, the company is in the process of building new applications for managing the workplace, while pushing into completely new environment. The new application suite will be doing the task of supplying businesses with predictive data and recommendations for management, and would also be able to map out employee performance analysis, career path suggestions and more. While there is great potential for the new apps, if the company does not perform up to standard, the result could be a further decline for Workday's stock. There are also a number of competing companies in the same industry of predictive management solutions, which could make it difficult for Workday to stand out in the crowd.

Missing Growth Targets

The company's stock is currently price at 22.4 times trailing 12-month sales, with it being heavily dependent on revenue growth and expectations. While Workday did manage to build sales over the past couple of years, the total expenditures have also risen due to the acquisitions and expansion costs.

The company's data demonstrated growth rate for costs to be slower than for revenue; however, the fact that Workday's share price has increased relative to sales growth may conclude that the company may be overvalued. This is why any sort of earnings misses or downward target revisions may be detrimental to the share price.

Possible Security Breaches

The cloud-based ERP software usually lets business stress less about maintenance and product replacement; however, it can also make crucial information less secure. According to SafeNet, cloud data breaches accounted for more than 20% of all breaches in the third quarter of 2014, with storage security becoming the main concern.

If at some point Workday experiences a security breach, there will be an enormous impact on the company's valuation. Although Workday does have some significant advantages over its competitors, such as Oracle (NYSE:ORCL) and SAP AG (NYSE:SAP), in terms of cloud-based offerings, these companies still manage to provide quick solutions which are no match for Workday. Even worse, the breach would not actually need to happen on Workday's network in order to have great impact on the stock. Similar hacks in the same industry could spell a disaster for the company's stock, due to its current fragile position.

Possible New Large Customers

On a positive note, there are still factors in play that could help the company recover from the recent decline. One of them is the possibility of acquiring new large clients, which will represent a major growth driver for the company in the future. While Workday has found success with the mid-sized companies, it now plans to move upmarket. In the previous quarter, Workday was able to secure Bank of America (NYSE:BAC) as a customer, which is the largest deal for the software maker to-date. Workday was also able to add another large customer, who is currently unknown. The acquisitions of large clients will be a great growth booster for the company, especially if the new customers subscribe to all enterprise software suites.

On October 8, the company also announced that TalkTalk Telecom Group (OTCPK:TLKTF), a British telecom company with a market cap of $4 billion, had signed to Workday's service. Although that deals did not produce a share price spike, it can be expected that more significant foreign signings would have a more powerful effect on valuation. If Workday is also able to boost its government and education segments, then it can expect great growth in the future.

New Deployment Partnerships

Workday has been able to make advancements in the deployment of major partnerships with Hewlett-Packard (NYSE:HPQ) and Computer Sciences Corp. (CSC). These represent the most positive news for the company in the last year. As the company is looking to move further into upmarket, it will be aiming for more large clients to serve as deployment partners. This particular strategy will allow Workday to reach more customers through the more reputable direct clients, which will allow the company to decrease the costs associated with acquiring new subscribers.

Final Thoughts

Currently, Workday's stock price is largely reliant on the business's ability to grow. As seen, there are valid reasons to be skeptical about the stock, such as the strong competition and fears of a future bearish market. Although there is no certainty that the company cannot provide wins for bullish shareholders, at the current point, investors would be wiser to stay on the sidelines until the stock produces new highs.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.