SUMMARY: Workday began to pivot from software-as-a-service (SaaS) to a platform-as-a-service model in 2018. The company is becoming a leader in machine learning and AI in the HCM market, and a PaaS model will assist platform-level ML capabilities. This also helps to leverage the Adaptive Insights acquisition by combining the insights from business planning across the other segments, such as financial management, HCM and analytics.
Market Research Future estimates the global human capital management software market will reach $24 billion by 2023 at a CAGR of 9 percent during the 2017-2023 forecast period. Workday not only is the leader in Gartner’s magic quadrant from a product standpoint, but had led the category in year-over-year growth of between 30-40%.
It is reasonable to believe Workday will control the majority of the $24 billion market if the company executes globally.
4ae9da06-c5a9-4965-b999-90042cd5af9d_Workday-Premium-Analysis-2019.pdf
Workday: 2019 Analysis
SECTION 1: Fundamental Overview
As with many cloud stocks on the market today, Workday has solid revenue growth yet is not profitable on a GAAP basis. Workday carries debt on its balance sheet of $1.22 billion. Net losses last quarter were $116 million.
In the previous quarter, Workday’s revenues grew 33% to $825 million, which beat forecasts of $814 million. Subscription services grew 34% to $701 million, exceeding expectations of $692-$694 million.
In the upcoming quarter, Workday expects to earn subscription revenue of $746 million to $748 million and services revenue of $124 million. Zack’s consensus states Workday is expected to report revenues of $872 million, up 29.9% from the year-ago quarter. This is in line with the company’s guidance on the last earnings call.
Unlike other cloud stocks, Workday is profitable on a non-GAAP basis. The company is expected to post quarterly earnings of $0.35 per share for a year-over-year change of 4 cents. Notably, expectations are lower than last quarter’s reported adjusted EPS of $0.43 per share.
Cash Flow is negative due to a streak of acquisitions, such as Adaptive Insights for $1.5 billion last year. In total, Workday has acquired 13 companies; many small startups which hurts its operating efficiency and overhead.
Last quarter, Workday raised its full-year outlook for subscription revenue a hair from $3.03 to $3.045 billion to $3.045 to $3.06 billion. The company states there is a subscription revenue backlog of $6.80 billion, up 30% yearover-year.
SECTION 2: Product Overview
Workday offers tools for enterprises to manage human resources, payroll, and finances. The company is a software-as-a-service company with over 85% of revenue coming from cloud subscriptions.
The company serves the human capital management (HCM) and financial management ERP markets with applications that expand its cloud-based system to include analytics and business planning. HCM allows an organization to staff, pay, organize and develop its workforce. Financial management ERP provides core finance functions, such as general ledger, accounting, accounts payable and cash management.
According to the fiscal Q2 2019 earnings call, more than 35 percent of the Fortune 500 and 50 percent of the Fortune 50 companies use Workday HCM for core HR. The product was placed as a leader in the Gartner Magic Quadrant for Cloud HCM Suites for midmarket and large enterprises in August 2018, with no update released since.
Workday’s cloud financial management solutions have less traction with 8 companies in the Fortune 500 and 530 customers overall.
The acquisition for Adaptive Insights, which is a provider of business planning and financial modeling tools, will help to strengthen Workday’s presence in Enterprise Resource Planning (ERP). At time of acquisition, Adaptive Insights also had 3400+ customers compared to Workday’s 450+ customers due to Adaptive Insights strength in the small-to-medium business (SMB) base.
Workday began to pivot from software-as-a-service (SaaS) to a platform-as-a-service model around 2018. The company is becoming a leader in machine learning and AI in the HCM market, and a PaaS model will assist platform-level ML capabilities. This also helps to leverage the Adaptive Insights acquisition by combining the insights from business planning across the other segments, such as financial management, HCM and analytics.
Machine learning and graph analysis applications were launched in April with Skills Cloud, which discerns team and candidate skills to offer hiring recommendations, team building and training. The newly launched Discovery board will uses ML, graph and pattern-detecting, and natural-language processing (NLP) generation to provide unified reporting.
Looking into the future, Workday’s ML capabilities may be able to reduce employee headcount. Although Workday prefers to not advertise the fact their product enhanced by machine learning can replace jobs, this is an understood benefit of Workday’s product that is presented at conferences.
SECTION 3: TAM and Competitors
Market Research Future estimates the global human capital management software market will reach $24 billion by 2023 at a CAGR of 9 percent during the 2017-2023 forecast period. Workday not only is the leader in Gartner’s magic quadrant from a product standpoint, but had led the category in year-over-year growth of between 3040%. Ceridian and Ultimate Software have posted the next highest growth levels. Ultimate Software is also in Gartner’s leader quadrant, yet was founded in 1990 and has been usurped by Workday. It is reasonable to believe Workday will control the majority of the $24 billion market if the company executes globally.
In my opinion, Workday’s competitors are a strength as Workday is without an attractive alternative. Both Oracle and SAP tend to be overpriced and clunky, which means they require too much software for the desired task.
In Oracle’s case, the company is distracted with data management, and sales and marketing. HCM and financial ERP are not Oracle’s core revenue segment, and this helps Workday standout as Workday invests more into newgen applications. Notably, Workday was spun out of a “hostile takeover” by Oracle of the company PeopleSoft in 2005 for $10.3 billion. After the acquisition, over half of PeopleSoft’s workforce was laid off, totaling 6,000 people. The former CEO of PeopleSoft and chief strategist went on to found Workday approximately two months later. Today, Oracle’s PeopleSoft is known for having security issues with several cases reported between 2010-2016 including social security numbers.
SAP has a similar lack of focus, and is also not entirely cloud based, which makes SAP unlikely to innovate faster than Workday on machine learning. Workday has captured more customers in the United States, as well, where the majority of its customers reside. Notably, SAP will be harder to compete against in its native geo, Europe.
On that note, Workday continues to see global expansion as one of its growth levers, with total revenue outside the U.S. up 41 percent to $184 million, representing 23 percent of total revenue.
See Conclusion Below Section 4 See Conclusion Below Section 4
SECTION 4: Technical Analysis:
By Knox Ridley
4.1 Moving Averages:
Workday is currently trading below its 50-Day Simple Moving Average, and just above the 200-Day Simple Moving Average. The 50-day is a generally accepted measure of determining the uptrend’s primary support, to where the 200-Day is considered the last stand for the uptrend. Workday is trading well below its 50-Day and has been riding the 200-Day.
Simple Moving Averages can seem arbitrary in their time frames, and in a way, they are. The 50-day and 200-day do not really align with any significant accumulation of time other than they are round numbers and are commonly accepted as indicators by the investing community. Because of their popularity, they are powerful tools that any chartist must factor into their analysis.
However, to get a better idea of who is in control of the price for a deeper insight other than popular moving averages, I prefer to use Anchored Volume Weighted Moving Averages (AVWAP). These averages factor in volume to the price, and we can anchor the average to any time we want.
I anchored, in green, the AVWAP, to the November lows in 2018, just as this renewed uptrend began. You can see that it sits just below the 200-Day.
This is a more accurate portrayal of who is in control of this trend. If this average is breached, and the price trades below, then Workday’s pressure will trend down and a larger retrace could be in its future. However, for now, the price is respecting this average, indicating that the uptrend is still intact.
4.2 Retrace Target:
In short, if Workday breaks this average, as well as breaks the current support range it is trading in, we can expect a deeper pullback. My first target is around the $172.5 support. This coincides with closing the gap, and will likely remain at this support for some time.
Below this level, and I will target the 38.2% retrace, which also coincides with the 168% extension. This range has also been a strong price cluster for the Workday’s price action, so it will be a likely target for any deeper retrace, which is around the $142-$140 region.
4.3 Internals:
The RSI was indicating negative divergence leading up to the sell off at all-time highs. This is evident with the red and green arrows going in opposite directions. The RSI has broken through the 40 line, and is attempting to climb back, while price stays flat.
The RSI is now turning back down before even hitting the 50 line. The momentum has faded from Wday, and the RSI is in a selling range. However, looking back at its 3-year trading history, you’ll notice that it’s hit the bearish zone numerous times, and each time it was a short stay.
Until Workday meets resistance multiple times at the 50 line and punctures the 30 line with force, it’s very possible that it could regain its momentum and continue in an uptrend.
Conclusion:
Quite a few stocks are showing weak price action, and are pointing to continued weakness, likely due to broader market issues, such as the inverted yield curve, trade war, etc. – rather than due to factors in the individual stock.
Workday is fundamentally strong with low competition and good prospects for future growth from machine learning, as indicated in the fundamental analysis. Ideal buy-and-hold from technical analysis is in the $142-$140 region. If the earnings report is weaker than expected, I’d see that as a buying opportunity – especially if the price breaks the $172 support and we get a deeper correction.
Short-term, Workday can make a good trade with call options at or near $190 and/or a small position with 10% trailing stop. Less than a month ago, Workday was at $212 and was at $195 less than a week ago. A strong earnings report could renew these prices. I personally like the end of September $190 call options. Per the paragraph below, any calls may need some time as this week has been a little choppy for cloud stocks.
This week, we are seeing mixed reactions to cloud earnings. Veeva Systems beat earnings Tuesday, received analyst upgrades, yet the stock price has dropped a few percentage points today. Anaplan also beat earnings, yet stock price dropped a few percentage points today. Okta, as well, is down after-hours despite an earnings beat. Therefore, there’s a chance, even with an earnings beat, that Workday’s price doesn’t withstand the broader market.
Please refer to the forum for updates.