Is It Too Late to Buy Workday Stock?

Workday's (WDAY -0.42%) stock surged 10% on May 26 after the cloud-based software company posted its latest earnings report. For the first quarter of fiscal 2024, which ended on April 30, its revenue rose 17% year over year to $1.68 billion and exceeded analysts' expectations by $10 million.

Its adjusted net income grew 57% to $342 million, or $1.31 per share, and also cleared the consensus forecast by $0.19. Workday's growth rates look healthy, but is it too late to buy the stock after its year-to-date gains of nearly 30%? 

Image source: Getty Images.

What does Workday do?

Workday's cloud-based human capital management (HCM) platform makes it easier for companies to staff, organize, and pay their workforce. It also provides financial tools to help companies manage their spending, as well as analytics tools for making better data-driven decisions. It serves over 10,000 organizations worldwide, including more than half of the Fortune 500 and a wide range of small to medium-sized businesses.

Workday went public in 2012. Between fiscal 2013 and 2023, its annual revenue rose at a compound annual growth rate of 37%. A $1,000 investment in its IPO would be worth about $7,700 today.

How fast is Workday growing?

Workday generated 90% of its revenue from subscriptions in fiscal 2023. It usually gauges its own growth in terms of its subscription revenue, the size of its total backlog in subscriptions, and its adjusted operating margins.

As the following table illustrates, Workday's growth in subscriptions has cooled off slightly over the past year but its backlog continues to expand. However, cost-cutting measures (including a 3% reduction to its workforce earlier this year) boosted its adjusted operating margins year over year and sequentially in the first quarter.

Data source: Workday. YOY = Year-over-year.

It now expects its subscription revenue to rise 18% year over year in both the second quarter and the full year. That's slightly higher than its prior outlook for 17%-18% growth for the full year. Analysts expect its total revenue to rise 16%.

During the conference call, Co-CEO Aneel Bhusri said Workday feels "good" about its "growth prospects throughout the rest of fiscal year '24" even though the macroeconomic environment will remain "unpredictable" and "challenging."

But even as Workday faces near-term challenges, it is looking to expand its margins as it reins in its spending. It expects its adjusted operating margin to expand from 19.5% in fiscal 2023 to 23% in fiscal 2024, while analysts expect its adjusted earnings per share to increase 44% for the full year.

It also notably squeezed out a slim profit of $136,000 on a generally accepted accounting principles (GAAP) basis in the first quarter of fiscal 2024, compared to a net loss of $102 million a year earlier. It expects that figure to climb throughout the year as its operating margins expand and it reduces its stock-based compensation.

But is Workday's stock attractively valued?

Workday is still growing, and it's well-insulated from the macro headwinds because its software can help companies optimize their spending during economic downturns. It also locks in its customers with sticky subscriptions, and its net revenue retention rate -- which gauges its year-over-year growth per customer -- remains comfortably above 100%.

Workday is notably growing slower than comparable cloud-based enterprise software companies like ServiceNow and Monday, which both help companies optimize their digital workflows and projects. But it's also valued accordingly -- Workday has a forward price-to-earnings ratio of 34, while ServiceNow and Monday are much pricier at nearly 50 and 200 times forward earnings, respectively.

That reasonable valuation suggests it isn't too late to buy Workday's stock, which remains nearly 30% below its all-time high. It probably won't skyrocket anytime soon, but it could mount an impressive comeback once a new bull market starts.