Like so many other growth stocks, Workday (WDAY -0.81%) has seen its stock price crater over the last six months. After hitting an all-time high of $300.90 in November 2021, shares have lost 46% of their value and now trade around $165 each.
Workday sells cloud-based software that helps customers address human capital and financial management needs, from time tracking and payroll services to talent recruitment and client procurement.
With the company poised to report first-quarter earnings results on May 26, investors want to know: Is now the time to buy Workday? Let's examine the bull and bear cases.
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Bull case: Price-to-sales valuation says it's a screaming buy
Since hitting its all-time high last November, Workday's price-to-sales ratio (P/S) has been cut roughly in half. For companies like Workday, which teeters on the edge of profitability, P/S ratios are a better gauge of valuation than price-to-earnings (P/E) ratios, which can either balloon or turn negative if a company reports little or no earnings.
As you can see, Workday is approaching its all-time low P/S ratio of 7.1. This is the third time the company's P/S ratio has descended to this level, and the prior visits in 2016 and 2020 proved to be excellent buying opportunities. Workday bulls would also point out that revenue growth remains strong. The company grew quarterly sales 21.6% year over year in its most recent quarter.
Bear case: Workday struggles to turn a profit
Investors are well aware that growth stocks have fallen out of favor with the broader market this year. Investors have turned their backs on companies that have prioritized "growth at any cost," in favor of deep value stocks like energy producers.
Workday has long struggled to turn a profit. The company's diluted earnings per share (EPS) in its most recent quarter (ending Jan. 31, 2022) was negative $0.29, a notable drop from $0.17 one quarter earlier. What's more, Workday has only reported positive diluted EPS twice -- both times coming in 2021.
WDAY EPS Diluted (Quarterly) data by YCharts
The bears point out that, having gone public in 2012, Workday has not yet endured a prolonged recession. It's not yet clear how the company will navigate a more challenging business environment and whether it can sustain its high growth rate.
Is Workday a buy?
On a valuation basis, Workday looks like a strong long-term buy-and-hold candidate. It's near multiyear lows that have proven to be great entry points in the past.
However, the near-term macroeconomic environment is challenging. Workday's enterprise customers are likely to see their own margins under pressure as inflation takes its toll. With Workday due to report earnings next week, investors should remain patient. If you're bullish on Workday, you might be able to buy it even cheaper in June.
