Workday (WDAY -1.19%) and Monday.com (MNDY 2.81%) are both cloud-based software providers that help companies digitally streamline tasks. Workday's human capital management (HCM) platform makes it easier for companies to hire, organize, and pay their workforces while managing their total expenses. Monday.com's platform enables companies to create their own custom work management apps to streamline, accelerate, and automate certain tasks. Those apps can be built from scratch, or through prebuilt "recipes" to be integrated into other productivity software.
Workday and Monday are both benefiting from the digital transformations of older businesses, as well as a desire by newer companies to build digital-native foundations. Those secular tailwinds initially impressed the bulls, and both stocks soared to record highs during the peak of the growth and investor enthusiasm in November 2021.
But both stocks stumbled as macroeconomic headwinds curbed their sales growth and rising interest rates compressed their valuations. That's why Workday and Monday.com now trade 26% and 61% below their all-time highs, respectively. Should investors consider buying either out-of-favor cloud stock as a turnaround play?
Different business models, similar near-term challenges
Workday and Monday.com don't compete against each other, but they both generate most of their revenue from their cloud-based subscriptions and tend to flourish in a healthy macro environment. But in a weak overall environment -- which has been the case over the past year -- their customers tend to rein in their spending on big software upgrades.
Workday's revenue rose 19% in fiscal 2022 (which ended in January 2022) and 21% in fiscal 2023. For fiscal 2024, it expects its subscription revenue to rise 18%, while analysts expect its total revenue to grow 16% to $7.21 billion.
Workday's slowdown seems mild compared to that of many other cloud-based software companies, but co-CEO Aneel Bhusri still warned during the company's latest conference call in May that the macro environment would likely remain "unpredictable" and "challenging."
Monday.com's revenue surged 91% in 2021 and grew 68% in 2022, but it only expects roughly 35% growth, to $702 million to $706 million in 2023. During the company's latest conference call, in mid-May, CFO Eliran Glazer attributed that slowdown to "challenging macroeconomic conditions."
Based on those expectations, Workday trades at 8 times this year's sales, while Monday.com has a slightly higher forward price-to-sales ratio of 10.
Both companies face similar headwinds, but Workday's slowdown is less apparent because it's a larger company that already serves over half of the Fortune 500. Its ecosystem is also sticky because companies will continue to use its HCM services to optimize their headcount and spending during economic downturns. Monday.com is a smaller hypergrowth company that primarily serves smaller businesses, and its ecosystem is arguably less resilient than Workday's because many of its customers will pause their development of new apps as they stop expanding.
Which company is more profitable?
Workday and Monday.com were both unprofitable by generally accepted accounting principles (GAAP) in their latest fiscal years. Workday posted a net loss of $367 million in fiscal 2023, which was down from a net profit of $29 million in fiscal 2022, while Monday.com halved its net loss from $137 million in 2021 to $64 million in 2022.
But on a non-GAAP (adjusted) basis, which excludes stock-based compensation and other one-time expenses, Workday is firmly profitable, while Monday.com isn't. Workday's non-GAAP earnings per share (EPS) grew 36% in fiscal 2022 and dipped 9% in fiscal 2023 as it faced tougher headwinds, but analysts expect a brisk recovery with 46% growth in fiscal 2024.
At $225 per share, Workday trades at 42 times this year's earnings estimate -- which makes it reasonably valued relative to many of its blue chip cloud software peers. For reference, ServiceNow -- which is generating faster revenue growth but slower earnings growth than Workday -- trades at 58 times forward earnings estimates.
On a non-GAAP basis, Monday.com's operating margin improved from negative 53% in fiscal 2020 to negative 17% in 2021, then rose again to negative 9% in 2022. Analysts expect that figure to finally turn positive this year and enable it to generate its first non-GAAP profit of $0.63 per share. But at $174 per share, Monday.com still trades at a whopping 276 times that forecast. However, its rising profits could compress that forward multiple over the next few years.
Which stock is the better buy right now?
I believe Workday and Monday.com could still have plenty of room to grow over the next few years as more companies digitize and automate their workflows. But for now Workday looks like a better buy than Monday.com for four simple reasons: Its growth rates are more stable, it's less exposed to macro headwinds, its business is more profitable, and its stock is cheaper.
