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Analysts Like The Workday Story After Q4 Report, But UBS Sees Better Value In Other SaaS Leaders

Shares of Workday Inc (NASDAQ: WDAY) are sharply lower despite the company reporting forecast-beating fourth-quarter results on Thursday. 

Benzinga · 02/28/2020 18:48

Shares of Workday Inc (NASDAQ: WDAY) are sharply lower despite the company reporting forecast-beating fourth-quarter results on Thursday. 

The Workday Analysts

Needham analyst Scott Berg maintained a Buy rating on Workday with a $250 price target. 

Morgan Stanley analyst Keith Weiss maintained an Equal-Weight rating and $196 price target.

UBS Securities analyst Jennifer Swanson Lowe maintained a Sell rating and $160 price target.

Mizuho Securities analyst Siti Panigrahi reiterated a Buy rating and $225 price target.

Are Financials Workday's New Stock Driver?

Workday's fourth-quarter billings were only in line with the consensus estimate, possibly disappointing investors, Needham's Berg said in a Friday note.

Deferred invoicing of financial sales may have led to the soft number, given the higher mix of financials deals overall, the analyst said. 

The 24-month recruitment process outsourcing growth of 22% year-over-year came in line with third-quarter growth, he said.

Lending credence to Needham's view that financials demand is trending above its and Street forecasts, 90 new financial deals materialized in the quarter, Berg said. 

Financials demand is likely to be the stock's next growth driver, the analyst said, adding that he also sees Workday's initial FY21 guidance as positive.

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Morgan Stanley Discusses Pushback To Workday Story

Workday reported a seasonally strong fourth-quarter print, with 30% year-over-year subscription bookings growth, 25% subscription revenue growth and 11.9% operating margin growth, Weiss said.

This helped the company generate $865 million in operating cash flow in fiscal year 2020, the analyst said. 

"We continue to be enamored by the large market opportunity Workday addresses and the best-in-class retention rates seen in their enterprise-focused subscription revenue base." 

Morgan Stanley sees the unlikelihood of significant upside to current fiscal year 2021 subscription revenue targets and the premium valuation of shares relative to peers ServiceNow, Inc. (NOW) and salesforce.com, inc. (NYSE: CRM) as pushbacks.

"We could get more constructive from either significant further pullbacks in the shares or increased confidence that a stabilizing growth rate in HCM and sustained growth in Financials could position WDAY to accelerate in FY22," Weiss said. 

UBS Sees Better Value In Other SaaS Leaders

Workday is a long-term leader in SaaS, but financials is a more challenging market within SaaS that is likely to weigh on growth as the HCM category matures, Swanson Lowe said.

The company's fourth-quarter results benefited from strong upsell, with the quarter proving to be the best-ever for Workday's financials segment, given the 90 new customer adds and accelerating growth in Planning, the analyst said. 

"We like the story, but see better value in other SaaS leaders like CRM and NOW, which trade at lower multiples on an EV/CY21 FCF basis despite offering similar-to-better free cash flow growth." 

Mizuho: Workday Progressing Well

With a record quarter in the  financials business and continued momentum in HCM, the company is well-positioned to exceed current fiscal year 2021 guidance, Panigrahi said.

The quarterly results make Mizuho incrementally confident the company is progressing well in its efforts to become the de facto leader in enterprise back-office software, the analyst said. 

"We continue to believe in both the company's short- and long-term growth and margin expansion opportunities," Panigrahi said. 

WDAY Price Action

Workday shares were slipping 0.31% to $170.67 at the time of publication Friday. 

Photo courtesy of Workday.