About Workday
Here is a glimpse into what each day of last summer looked like in my shoes.
Wake up, get myself ready for the workday (pun intended, chill out) hop on the city bus in a tight, wrinkled burnt orange t-shirt in triple-digit-degree weather, step off at the nearest bus stop to my job as a student manager at my university’s largest and most densely populated dining hall and proceed to scrub and wash dishes for hours.
Some go to Cabo, and some have fun.
You know what I chose.
In all seriousness, I did make a lot of good friends and connections and it ended up being an excellent way to save up for school, and for more reasons than one, I won’t forget my time as a student manager within the university’s dining facilities.
At any rate, a tried-and-true constant that I had in this role as well as in my relatively new current part-time job at the university was and incidentally remains Workday.
To me and my coworkers, it is simply where we clock in our work hours every week or so, however, upon performing some further due diligence on the company, it is far more than that, at the end of the (work)day.
Specifically, Workday is a human capital management (HCM) company (we’ve seen one of these before, by the way) that houses and manages basically anything and everything involving and between an employee and their respective employer.
From applications and absences to wages, benefits, taxes, training modules, scheduling and so much more, Workday is a force to be reckoned with in the context of the HCM arena.
Founded by David Duffield and Aneel Bhusri in 2005, this company started with humble beginnings and has since grown into a multi-billion-dollar enterprise, serving a wide range of clients across all sorts of industries and geographies, for instance, as Workday is an HCM vendor for companies such as Walmart, Apple, CVS, Shell, the University of Texas at Austin, The Texas A&M University System (but who cares about them), Bank of America, Morgan Stanley, Shake Shack, MGM Resorts, NASCAR, Boston Scientific and the list truly goes on and on.
Now, it should be fairly apparent at this point that Workday is indeed a technology company, and with that, it is far from surprising that it operates a software-as-a-service (SaaS) model, charging its clients a monthly subscription fee for having access to its software and related services and perks.
Additionally, given that it is undoubtedly a tech company, its share price has also certainly enjoyed riding the artificial intelligence (AI) tailwind, experiencing a share price increase just north of 30% over the last one year’s span of time.
As it relates to our initial thoughts with respect to this company being one that could reasonably be considered recession resistant or not, this is a company that, largely irrespective of the prevailing state of the economy, has become so well integrated into its client’s systems (the rather casual business term for this is “sticky”) that it is exceedingly difficult for their clients to switch from their current HCM provider and systems thereof to another, largely because it would more than likely be a complete and utter corporate hassle but also because, let’s face it, employees just like me are not the largest fans of change, especially as it relates to the systems they are forced to interact with on a daily basis.
Of course, this all bodes well for a company such as Pleasanton, California-headquartered Workday, but of course, like practically every single other company on the face of the earth, it more than likely isn’t fully immune to recessionary pressures or other economic headwinds, as one would be wise to remind themselves that Workday has some inherent vulnerabilities as it relates to labor markets across the globe, and when these markets soften or unemployment rises, a company such as this one could perhaps not fare as well as it would in a more prosperous, expansionary economic setting.
All of this to say, Workday is a gigantic software company that just happens to deal within the human capital management segment of the economy, and in determining whether or not the company’s stock (NASDAQ: WDAY) is worth pondering a purchase in today, we must responsibly defer to the numbers and let them speak for themselves.
Numbers, you may enter.
Workday’s stock financials
In kicking this shindig off, it can be found that Workday is a $66.59 billion company (according to its market capitalization, which the product of its current share price and the number of its outstanding shares of stock) with a present share price of $252.22 along with a price-to-earnings (P/E) ratio of 41.65 all while offering its shareholders an annual dividend of $0.00.
In interpreting these initial facts and figures, one could say that Workday’s stock (NASDAQ: WDAY) is objectively overvalued given its price-to-earnings ratio being more than double than the amount of the commonly held fair value benchmark of 20, however, we have our fair share of suspicions that this company is growing its revenues at a brisk rate annually and if we are correct and it is growing them at a rapid enough rate, its objectively overvalued shares might start to seem a bit more in line with what they’re actually currently worth, or much closer to its actual fair value.
Of course, we will investigate further momentarily.
Nevertheless, not paying out an annual dividend was to be nothing but expected for this company, as (presumably) growing SaaS and other technology companies are much better off not draining cash out of the business but rather continuously investing and reinvesting its available capital back into its operations so as to continue developing a moat around its products and services.
Regarding the present state of the company’s balance sheet, Workday’s executive suite is at the helm of just about $16.4 billion in terms of total assets as well as nearly $8.4 billion in terms of total liabilities, which is quite a strong balance sheet given that it almost maintains a 2:1 asset-liability coverage ratio, seemingly affording itself the ability to continue financing growth both internally and externally while also more than likely not becoming overleveraged anytime soon.
This is a fantastic operating base, especially for a growth company.
Speaking of growth, as it relates to the company’s income statement, you can bet your bottom dollar that Workday’s total annualized revenues (that is, stemming from 2020) have been growing at a comforting rate, but candidly still not at a rate that is impressive enough to warrant overpaying this much for a slice of the Workday pie, at least from where I stand.
More specifically, the company’s annual revenues in 2020 were $3.6 billion, rising the following year to $4.3 billion, north of $5.1 billion in 2022, $6.2 billion in 2023, climbing to its latest reported figure of $7.2 billion, doubling the entirety of its annual revenues over this relatively short period of time, which is certainly no small accomplishment, however, the AI hype train has pumped up this company’s stock price a bit too much relative to its recent revenues.
Peering over the company’s cash flow statement, Workday’s total cash from operations have proven themselves to be in tremendous shape over the last handful of years, growing from a base of $865 million (2020) all the way up towards its latest reported figure of $2.1 billion, more than merely indicating that this company is finding it easier and easier to ultimately extract cash through its business operations, which, for a technology company as somewhat young as this one, is truly impressive, especially when considering the turmoil and strain in the market during and following COVID-19.
Workday is a workhorse on the cash flow generation front, no ifs, ands or buts about it.
Workday’s stock fundamentals
With respect to the company’s ability to turn a profit and how it measures up against the industry’s average, according to TD Ameritrade’s platform, Workday’s trailing twelve month (TTM) net profit margin stands at 19.02% to the industry’s comparable average of 24.46%, which ultimately doesn’t make us think any less of this company one bit, as we are simply counting our blessings with its TTM net profit margin being in high-teen stature, as even many tech companies that are as large and powerful as this one do not have a positive TTM net profit margin to show off, however, Workday is apparently a different breed in this aspect.
Although its TTM net profit margin is still lower than that of the industry’s cumulative average, with the continued deployment of artificial intelligence and of other potential cost cutting technologies, we are far from sweating bullets over this company’s current and future TTM net profit margin.
In terms of the company’s TTM returns on both assets and investments, as also displayed on TD Ameritrade’s platform, Workday generally remains in good company yet again, although it still technically does lag behind the industry’s averages on both fronts, for example, trailing behind with a TTM return on investment of 13.64% to the industry’s comparable average of 18.78%, not being terribly far off but far enough to be a noticeable discrepancy.
Nevertheless, we don’t initially view this as a sort of systemic problem or issue for Workday, but rather a byproduct of competing against some stiff, storied, been-around-the-block competition that have been in business far longer, Automatic Data Processing or ADP being the OG (if you will) in the human capital management category.
It doesn’t appear to be as much of a Workday-centric issue, but rather a matter of the competitive landscape in which it operates.
Should you buy Workday stock?
Over the years, Workday has carved out a very impressive track record for itself.
It is a SaaS company to be reckoned with and it has definitively cornered its market in HCM, not to mention the fact that we deem it to be largely resistant to recessionary pressures (which was further solidified with reference to its most recent annual revenue figures) and the aforementioned stickiness of the company’s platform(s) and products within are promising in this respect as well.
However, some say the proof is in the pudding but in this instance I say the proof is in the pricing, as no matter how fortified this company’s balance sheet is, how strong its recent historical total cash from operations have been nor how consistently the company has been growing its revenues, shares of Workday stock (NASDAQ: WDAY) are overvalued, again, largely due to the AI wave leading up to this article.
Until this company’s share price comes down back to earth and in turn offers a more appealing and reasonable corresponding price-to-earnings ratio, we remain not being in the business of buying highs in this hot technology market.
Hence, the “sell” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.
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