Workday’s stock pullback is an opportunity

Workday, Inc. NASDAQ: WEDNESDAY released a lackluster FQ2 report that left the market wanting more. However, as tepid as the results are, the underperformance is relative to analysts’ consensus estimates. The results are great for the company and shareholders, providing ample cash flow for capital returns, investments and growth for acquisitions.

The bottom line is that stock prices may fall now, but this is a short-term event. The long-term outlook is solid and this stock will rise. The question is how it might go now and how high it might go once the recovery begins.

Analysts Defend Workday; consensus shifts upward

Analysts are defending their positions following the fourth quarter release, so don’t read too much into the earnings comparisons. Marketbeat.com tracks 32 analysts who consider this company as the leading provider of back-office software solutions and are pushing the market higher. Not only is Workday deepening its services penetration in domestic markets, but international expansion opportunities are robust, margins are solid, and acquisitions position it to sustain growth long into the future.

Analyst consensus target lags the market, but is being driven higher with revisions. Marketbeat is tracking five revisions in the first 24 hours of release, including a lowered target and another that reaffirmed that average to a consensus of $315 or 5% upside. These revisions cause the consensus to be up 33% year-over-year and rising. The new targets include two more targets in line with the high end of the range or with a 15% upside.

Workday had a solid quarter, indicating continued growth in 2024

Workday’s results were mixed and forecasts were weak, only relative to analyst consensus targets. Revenue of $1.92 billion was as expected, but up 16.5% year over year, supporting a fourth quarter of growth at this pace. Growth is supported by an 18% increase in subscriptions driven by full-platform companies and large customers. Subscription portfolio, an important indicator of future results, grew 27% on a 20% increase in 12- and 24-month contracts.

Revenue growth resulted in another quarter of margin improvement. GAAP operating margin improved to 4.1% from last year’s loss of 5.5%, while adjusted margin improved 540 basis points. This led to a 23% increase in operating cash flow and a 46% increase in free cash flow. Adjusted earnings rose 58% and beat consensus by a cent.

The forecast is weak, with revenues expected to be around $7.755 billion for the year, compared to the $7.7 billion expected by analysts. The caveat is that revenue growth will persist in the 16% to 17% range for another year, and earnings strength should continue.

Workday’s capital returns and acquisitions boost stock price prospects

Workday doesn’t pay dividends, but buys back shares. Repurchases topped $420 million in the fourth quarter and a reauthorization was announced, but there’s a problem. Stock-based compensation more than offsets buybacks, increasing the count by 4% year over year. In light of this, the additional $500 million is good news for investors, but may not support price action in 2024 as well as it could.

Workday announced its acquisition of HiredScore, which is good news for two reasons. The first is that HiredScore is a talent solutions specialist and will fit seamlessly into Workday’s business portfolio. The other is artificial intelligence. HireScore is an AI-powered recruiting and HR management tool that can automate many HR functions by matching the best candidates to any position. The amount of the deal was not disclosed but is expected to close in the 2nd quarter. Opportunities for Workday include building the brand, including it in new offering packages and cross-selling.

Technical Outlook: The business day uptrend is intact

Workday’s stock price fell nearly 5% after its second-quarter release, but investors are buying the dip. The market fell towards the short-term 30 day EMA and bounced to form a green candle. The market could move lower from here, but sideways action is indicated. The next few days will tell if the market can recover from here; if so, new highs could be set in early spring. Otherwise, new highs may not be reached until the end of the year.

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