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Workday: Already Priced For Perfection

Dec. 05, 2018 7:51 AM ETWorkday, Inc. (WDAY)7 Comments
Himalayas Research profile picture
Himalayas Research


  • Workday reported great results for Q3. Subscription revenues were 2% higher than estimates.
  • Despite strong win rates, some demand might have pulled forward from Q4 and thus guidance for Q4 and next year implies some deceleration.
  • HCM cloud adoption doesn't seem to translate to financials management, which leaves Workday short of product diversity.
  • Competition is becoming more intense as the industry matures and may slow adoption rates.
  • Currently trades richly at over 100x forward earnings for 30% EPS forward growth rate.

workday, himalayas research, equity

Workday (NASDAQ:WDAY) delivered outstanding results on its third quarter with subscriptions revenues beating street estimates and its guidance by 2%. Operating margin of 6.7% was 270 bps higher than guidance. Win rates in its Human Capital Management ("HCM") segment have continued to be strong, and its financial management product segment was highlighted this quarter to have grown 50% from over a year ago. However, its disclosure regarding financials segment performance has been inconsistent, appearing to highlight selectively when the quarter performance was strong.

But despite its strong results, management's guidance for the fourth quarter and next year implied that there might be some slowdown. The company expects subscription revenue in Q4 to be up 6.3% sequentially, which is a deceleration from the third quarter which grew 10.4% sequentially. On the earnings call, Workday mentioned that there was some demand that was pulled forward into Q3 from Q4. The professional services segment was even guided to drop -5.7% quarter over quarter.

I rate Workday as a Sell as valuation is too high compared with peers. Its growth is strong but not compelling enough. In a base case scenario, I see 37% downside.

Lack of Diversified Product Range May Hurt Long-Term Growth

Workday offers cloud-based solutions to mostly large enterprises via two segments - human capital management ("HCM") and financial management. Recently, the company has shifted towards targeting mid-market, which I interpret that it is seeking to find growth elsewhere as adoption rate with Fortune 500 companies slows. Mid-sized companies have different needs from the large enterprises, and the costs of developing solutions may not necessarily be shared. So, I don't expect product development expenses to materially go down.

Reluctance in customers to shift financials into cloud

According to participant information gathered at this year's Rising event in Las Vegas, only 9 (8 in

This article was written by

Himalayas Research profile picture
Buyside analyst covering global consumers and tech. I've been investing personally and professionally across major equity markets for a few years. Subscribe for equity research and trading ideas.Opinions are not qualified investment or trading advice. Please do your own due diligence.

Analyst’s Disclosure: I am/we are short 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.

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