The major stock indices were down modestly by Wednesday afternoon. Recession fears were back in the spotlight thanks to weak retail sales data, but generally strong earnings reports blunted the impact.
|Index||Change at 1 p.m. EDT|
|Dow Jones Industrial Average (DJINDICES:^DJI)||(0.06%)|
|S&P 500 (SNPINDEX:^GSPC)||(0.24%)|
|Nasdaq Composite (NASDAQINDEX:^IXIC)||(0.39%)|
Commentary from analysts moved some individual stocks on Wednesday. A cautious tone from a few analysts sent shares of Workday (NASDAQ:WDAY) plummeting, while a price target boost lifted shares of Amazon (NASDAQ:AMZN).
Workday hit by analyst caution
Software-as-a-service provider Workday was unable to win over analysts with its annual Workday Rising event. The stock was down 12.4% at 1 p.m. EDT Wednesday as analysts struck a cautious tone. Since peaking a few months ago, Workday stock is now down nearly 30%.
Analysts at RBC kept their outperform rating on the stock, but they nudged down their price target from $225 to $212. RBC sees a solid growth story, but it noted that the company's growth rate will slow as it goes after larger customers.
Macquarie Research and Jefferies are less optimistic, each with the equivalent of a hold rating on the stock. Macquarie is concerned that new products from Workday will be tough to monetize, while Jefferies sees better opportunities in other SaaS stocks.
Workday's valuation is certainly optimistic. Even after Wednesday's decline, the stock trades for nearly 11 times trailing-12-month sales. Workday is miles away from profitability on a GAAP basis, like many high-flying SaaS stocks, and it trades for nearly 100 times the average analyst estimate for non-GAAP (adjusted) earnings.
When a stock is this deep into nosebleed territory, slowing growth is like kryptonite. The stock could have much further to fall if Workday's results can't match the lofty expectations built into the stock price.
Amazon boosted ahead of earnings
E-commerce and cloud computing giant Amazon will report its third-quarter results on Oct. 24. An analyst at Credit Suisse is expecting good news, raising his price target on the stock from $2,225 to $2,400. Shares of Amazon were up about 0.5% at 1 p.m. EDT, outpacing the broader market.
Credit Suisse analyst Stephen Ju expects Amazon's e-commerce operating margin to expand. Ju also sees strong advertising growth pushing up free cash flow more than expected, along with strong growth in the cloud computing segment. Ju reiterated his outperform rating on the stock Wednesday morning.
This price target boost comes soon after Amazon began to reduce the number of low-priced items subject to its "add-on" program. Previously, many cheap items would only ship with orders of $25 or more, regardless of whether the customer was a Prime member. Amazon is now shipping many small items with no restrictions for Prime members.
This move will certainly help Amazon gain market share, but it's unlikely the company can turn a profit by shipping low-priced items individually, even with its own logistics infrastructure. This will make it difficult for Amazon to expand its e-commerce operating margin, and it's a questionable strategy given the pressure antitrust regulators are already putting on the company.
Amazon's management will likely provide more details on its low-priced-item strategy during the earnings call later this month.