When Workday (WDAY 2.82%) released its fiscal third-quarter 2020 results early last month, there was nothing technically wrong with its headline numbers. Revenue had climbed more than 26% to $938.1 million, translating to adjusted (non-GAAP) net income of $0.53 per share. Both figures were well above expectations, and CEO Aneel Bhusri boasted that "companies of all sizes and industries continue to select" Workday's flagship human capital management (HCM) and financial software solutions to meet their needs.
Indeed, after adding half a dozen new Fortune 500 clients to its base, Workday now counts over 40% of that group, about 50% of the Fortune 100, and 17% of the Global 2000 among its more than 3,000 customers. What's more, its budding Workday Financial Management product by itself has grown its base to more than 800 total customers. And at the company's most recent investor day in October, Workday had only just informed investors that upselling its new Workday Planning product platform represents an incremental $5 billion market opportunity.
The source of Workday's steep plunge
Of course, tacking on an extra $5 billion to its total addressable market was nothing to scoff at. But it also paled in comparison to what management outlined as their total addressable market (TAM) of $81 billion in 2018 -- a figure some industry estimates see soaring over 40% to $115 billion by the end of 2022.
Nonetheless, Workday stock fell hard in response last month after the company warned investors will need to wait until "fiscal 2022 and beyond" to see meaningful incremental growth from its newest products and impending product launches. Among those products are the Workday Cloud Platform, People Analytics, and the Workday Employee Experience solution.
But while shares have largely recovered from last month's drop as the broader market climbed to all-time highs, that also raises the question: Is Workday stock worth considering today? I think so.
Even putting aside Workday's enormous TAM, rewinding back to last month's call shows Workday offered seemingly soft forward financial guidance for fiscal year 2021 subscription revenue to increase "just" 21% year over year to roughly $3.73 billion. Make no mistake, that was a notable deceleration from current guidance for 29% growth in fiscal 2020 and around $80 million below most analysts' models at the time. To be clear, however, that "light" guidance was not indicative of lost growth opportunities, but rather (according to Workday CFO Robynne Sisco during the subsequent conference call) "the timing of these launches and the time it takes a new product to impact subscription revenue growth at [Workday's] scale."
Even Workday's recent $540 million all-cash acquisition of Scout RFP, a cloud-based strategic sourcing and supplier engagement platform, is expected to contribute less than 1% to the company's consolidated subscription revenue growth this fiscal year.
But let's pose another question: What happens to Workday shares at the first sign that those new products are finally yielding fruit -- or if the company extends its long-standing habit of underpromising and overdelivering with each passing quarter?
As soon as those catalysts become clear, I see no reason the stock can't extend its recent gains and power above even its calendar 2019 highs (shares currently trade about 20% below those levels). Patient investors willing to buy and hold before that happens would do well to grab one of the market's most compelling growth opportunities.