Workday (NASDAQ:WDAY) is breaking out higher on strong fundamental growth. Although the company has only been public for a few years, its price action has formed a strong base formation and is now breaking out higher. Demand for its cloud service is strong, leading to revenue growth. It continues to lose money, but is reducing the size of its losses in recent quarters. I am buying stock in the name and looking to hold for 1-5 years.
WDAY's share price looks to be breaking out higher on both its short- and long-term charts. Below are its hourly and monthly chart. Although WDAY has not been a public company for very long, its share price looks to be building a solid long-term base. As fundamental growth has accelerated, investors have begun to bid its share price up to new highs. Its recent break above $115 was significant as this level had acted as strong long-term resistance.
Moreover, on its short-term chart, the price action is similarly bullish. The stock has trended higher over the last year, with few pullbacks, and no selling pressure strong enough to derail the trend lines.
As its fundamental story improves, and demand for its services continue to be strong, its stock should continue to trend higher. I am however watching the $119 level as a stop-loss. This area has acted as support recently, and should its share price dip below these levels, it would violate my buy thesis and force me to sell.
Source: Trading View
WDAY is seeing strong top-line growth while it attempts to turn to profitability in coming years. In the most recent quarter, the company saw total revenues come in at $555.4 million, an increase of 34.4% from the third quarter of fiscal 2017. This was led by a rise in subscription revenues to $463.6 million, an increase of 37.2% from the same period last year. Subscription revenue represents about 83% of total sales, signaling its strong growth is having a significant impact on WDAY's top-line.
The company's leadership in enterprise cloud applications for finance and human resources have led to WDAY's impressive growth in recent years. For example, the company is the leading provider of finance and HR in the cloud, according to management. Not only did WDAY see continued traction in finance, but now more than 30% of Fortune 500 company's have selected its platform for core HR.
Additionally, the company is continuing to invest in future products and platforms for its customers. WDAY is increasing strength among medium enterprises and is seeing strong adoption of new products like Workday Planning. This allows the company to continue growing market share globally, while maintaining high customer satisfaction across the industry, according to management.
WDAY's subscription based model underpins its revenue success. Its subscription model stabilizes its cash flow, and allows for a recurring revenue stream when the company on-boards new clients. For example, the recurring cash flow of its revenue model allows its to allocate more capital towards investment projects, while planning spending in its core-operations as well.
Management had this to say about its areas of investment:
We continue to focus our investments on areas of the business that drive long-term growth, while delivering strong operating margins and cash flow expansion over time. We are expanding ability to realize increasing share within its $69B TAM.
One of the key issues with WDAY is its large operating losses. In its most recent quarter, its operating loss was $80.1 million, or negative 14.4% of revenues, compared to an operating loss of $105.9 million, or negative 25.6% of revenues, in the same period last year. While losses are still steep, it is getting better on a relative basis.
Below is a chart of both WDAY's revenue and earnings per share. While the company's revenue has nearly quadrupled over the last five years, its losses have increased. Only in the last quarter did losses become more shallow. The key is that WDAY continues to see strong demand for its products, allowing for the smooth exponential growth fueling investor optimism and its share price higher. When bottom-line growth picks up in coming years potentially, this could further drive returns for shareholders.
WDAY is breaking out higher on strong fundamental support. Although the company has only been public for a few years, its price action has formed a strong base formation and is now breaking out higher. Demand for its cloud service is strong, leading to revenue growth. It continues to lose money, but is reducing the size of its losses in recent quarters. I am buying stock in the name and looking to hold for 1-5 years.
This article was written by
Disclosure: I am/we are long WDAY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.