Please ensure Javascript is enabled for purposes of website accessibility

Does Workday Still Deserve Its Premium Valuation?

By Leo Sun - Oct 20, 2019 at 9:42AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A slowing core business, expansions into more competitive markets, and a lofty valuation all raise tough questions about Workday’s future.

Shares of Workday (WDAY -1.07%) plunged 11% on Oct. 16 after the enterprise cloud services provider's analyst day presentation failed to impress investors. Workday stated that its core human capital management (HCM) revenue would only rise about 20% this year, marking a slowdown from previous years.

That comment cast a dark cloud over Workday's future, but its stock still trades at over 70 times forward earnings after giving up its year-to-date gains. Let's take a closer look at this cloud company to see if it deserves that premium valuation.

A computer linked to a cloud service.

Image source: Getty Images.

What happened to Workday?

Workday's HCM platform lets companies staff, organize, and pay their workforces. Companies can also use its analytics tools to make data-driven business decisions, and its financial tools to oversee their budgets.

Workday's HCM platform already serves over 40% of the Fortune 500, including heavyweights like Walmart, Target, and Bank of America. On the surface, Workday's revenue growth looks rock solid.

YOY growth

Q2 2019

Q3 2019

Q4 2019

Q1 2020

Q2 2020







YOY = Year-over-year Source: Workday quarterly reports.

However, there's a growing concern that Workday is running out of room to grow in the HCM market. In response, it's expanding its ecosystem by cross-selling new services tools for ERP (enterprise resource planning), financial tools, analytics, and credential management.

Unfortunately, tech giants like Oracle, SAP, Salesforce, and Microsoft are all bundling similar tools into their cloud-based services. Workday is also courting smaller companies and overseas customers, which are more exposed to macro headwinds than big Fortune 500 companies. These moves indicate that it's expanding into less reliable markets to offset the slowdown of its core HCM business.

How did the analysts react?

Several analysts immediately expressed their concerns after Workday's analyst day presentation. RBC Capital, which maintained an "outperform" rating on the stock, cut Workday's price target from $225 to $212 and warned that its growth was slowing due to a high "penetration of large accounts." Analysts at Stifel and Deutsche Bank echoed similar concerns about its HCM business.

Macquarie, which maintained a "neutral" rating with a $196 price target, warned that several of Workday's new products (like ERP, analytics, and blockchain-enabled credential tools) would be "difficult to monetize." Citi, which rates the stock as "neutral" with a $192 price target, dubbed its shift toward international and mid-market customers as "lower-confidence sources of growth."

A worker accesses analytics tool on his smartphone and laptop.

Image source: Getty Images.

Jefferies, which maintained a "hold" rating with a $188 target, also noted that similar software-as-a-service (SaaS) companies are growing at comparable rates with higher margins and cheaper valuations.

Analysts currently expect Workday's revenue to rise just 27% this year and decelerate to 23% next year. Its adjusted earnings, which exclude stock-based compensation and other one-time expenses, are expected to rise 24% this year and 31% next year. Workday, like many high-growth cloud companies, still isn't profitable on a GAAP basis.

Was the sell-off an overreaction?

Investors should always take analysts' comments with a grain of salt, but they highlight valid points about Workday's shift toward less reliable markets and its valuations. It also isn't tough to find other cloud stocks with wider moats and more attractive valuations than Workday.

One notable example is Veeva Systems (VEEV -1.93%), which provides cloud services to life science companies. Veeva doesn't face any meaningful competitors, and analysts expect its revenue and adjusted earnings to rise 24% and 30%, respectively, this year. It's also one of the few cloud companies to remain profitable by both GAAP and non-GAAP measures. Yet Veeva trades at just over 60 times forward earnings, compared to Workday's forward P/E of 72.

Therefore, it wasn't surprising when Workday's stock plummeted after its presentation. Its stock was priced to perfection, but the company couldn't deliver the growth that its valuation demanded. Workday still deserves to trade at a slight premium to its growth rate, but the stock still looks frothy at these levels -- so investors should wait for a pullback or check out stronger cloud plays like Veeva instead.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Microsoft,, Veeva Systems, and Workday. The Motley Fool has the following options: long January 2021 $85 calls on Microsoft and long January 2021 $100 calls on The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Workday, Inc. Stock Quote
Workday, Inc.
$175.89 (-1.07%) $-1.90
Veeva Systems Inc. Stock Quote
Veeva Systems Inc.
$225.12 (-1.93%) $-4.43

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/18/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.