What is ESG? It stands for environmental, social, and governance, and it's a broad framework that encourages companies to remain conscious of the impact of their operations beyond financial results. ESG investors set criteria for what stocks they buy based on a company's policies and with the hope of influencing a corporation to act responsibly.
New reporting requirements have been proposed by the Securities and Exchange Commission (SEC) in the U.S. that would require organizations to closely track and disclose ESG metrics. In the United Kingdom, some ESG reporting is already mandated for over 1,300 of the largest companies.
It means ESG is set to become a key focus in the corporate arena rather than a sideshow, and new tools will be needed to meet reporting requirements. A leading provider of such tools is Workiva (WK 0.42%), and it's making significant investments to prepare for a world where ESG is front and center. Here's why Wall Street thinks Workiva stock could more than double from where it trades today.
Turning data into dollars
ESG is a new segment for Workiva, but the company has always been focused on helping companies manage their data. In the modern economy, especially with remote work, organizations find themselves using multiple online applications to run day-to-day operations. This means data is often spread across several locations, which leaves management constantly chasing its tail.
That's the problem Workiva solves. It's a data aggregation tool that connects with dozens of leading software platforms like Microsoft's Excel, Alphabet's Google Drive, and Salesforce's Tableau. It gives managers visibility over the data within all of those applications in one place where they can draw upon it to compile reports or simply monitor operations.
Workiva provides over 350 templates for different SEC reports, which are particularly useful for public companies and financial institutions. Workiva serves as a source of truth because data is pulled from across applications rather than manually calculated and entered, so managers can use the platform to reliably create, validate, and file SEC documents.
Now, Workiva is leveraging its expertise in data to deliver an ESG reporting solution to its 4,408 customers. The platform will offer different ESG frameworks to suit different business types, which also means companies will be able to switch and customize their reporting as their needs evolve.
Adding more value for investors
At the end of 2021, Workiva said a core focus for the new year would be to capture the significant ESG opportunity as it would be an important piece of the company's future growth. In a recent survey conducted by Workiva, 63% of respondents in the United Kingdom felt that their organizations weren't well prepared for ESG reporting requirements, and 73% didn't trust the data that was being reported to stakeholders.
These are problems Workiva can help solve and according to some estimates, this ESG data market opportunity could exceed $5 billion annually by 2025.
Over the last five years (2016 to 2021) the company grew its revenue at a steady 20%, and in 2022 it expects the same rate of growth, which will carry annual sales to $535 million. Given the future size of the ESG market alone, there's plenty of room for Workiva to grow its revenue further.
Importantly, much of Workiva's growth is coming from its largest customers who spend at least $300,000 each year with the company. In the recent first quarter of 2022, Workiva grew this specific customer segment by 42% year over year, compared to just 16% for its total customer base. This trend will likely expand as ESG becomes a larger part of the corporate sector.
Wall Street is bullish
Workiva stock mostly flies under the radar, with just eight Wall Street analysts covering it. But it's worth noting that none of them recommend selling, and they have a consensus price target of $109 per share. That represents a potential upside of 65% from its current level.
But analysts at Berenberg Bank think Workiva stock could soar to $145, which would be a 119% jump from here.
Workiva is still losing money, which is common for technology companies tackling new opportunities. But its cash burn is relatively modest at just $37 million in 2021, so with $520 million in cash and marketable securities on its balance sheet, it has a very long runway to generate scale and turn profitable.
Since its stock is down 62% from its all-time high amid the broader tech sell-off, it might be an opportune time for investors to start building a position in this company of the future.