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Workday Upgrades Fiscal 2021 Subscription Outlook after Strong Q2 Earnings; Buy with Target Price of $250

Vivek Kumar
·5 min read

Workday Inc, an American on‑demand financial management and human capital management software vendor, reported a 19.6% increase in total revenue in the second quarter as subscription-based sales surged amid COVID-19 pandemic and raised its revenue forecast for the fiscal year 2021, sending its shares up about 11% in pre-market trading on Friday.

The leader in enterprise cloud applications for finance and human resources also announced that it has promoted Chano Fernandez to co-CEO, alongside Workday Co-Founder Aneel Bhusri, who was previously sole CEO. Both co-CEOs will report to the Workday Board of Directors.

Workday’s total revenues increased 19.6% to $1.06 billion from the second quarter of fiscal 2020. Subscription revenue climbed 23.1% to $931.7 million from the same period last year. Net loss per basic and diluted share was $0.12, compared to a net loss per basic and diluted share of $0.53 in the second quarter of fiscal 2020. Non-GAAP net income per diluted share was $0.84, compared to a non-GAAP net income per diluted share of $0.44 in the same period last year.

“We’re fundamental fans, but believe shares are fairly valued at 12x 2021E rev. vs. comp group at 11.7x. Maintain Hold and raise price target to $250,” said Brent Thill, equity analyst at Jefferies. “We believe unearned revenue will continue to be volatile given the current environment and that investors should focus on subs. backlog.”

Workday forecasts fiscal 2021 subscription revenue between $3.73 billion and $3.74 billion, higher than the previous forecast of $3.67 billion to $3.69 billion.

Workday shares rose about 11% to $240 in pre-market trading on Friday after closing 1.41% higher at $216.63 a day before.  Also, the stock is up over 30% so far this year.

Executives’ comments

“It was a strong quarter despite the environment, with continued demand for our products as more organizations realize how mission-critical cloud-based systems are in supporting their people and businesses through continuous change,” said Aneel Bhusri, co-founder and co-CEO, Workday.

“We executed extremely well in the second quarter and delivered solid results, with subscription revenue growth of 23.1% and non-GAAP operating margin of 24.3%,” said Robynne Sisco, president and chief financial officer, Workday.

“As a result of our strong Q2 performance, we are raising our fiscal 2021 subscription revenue guidance to a range of $3.73 billion to $3.74 billion. We expect third-quarter subscription revenue of $948.0 million to $950.0 million. We are also raising our fiscal 2021 non-GAAP operating margin guidance to 18.0%. Despite the near-term uncertainty that remains, our first-half performance has reinforced our confidence in the fundamental strength of our business, and in the long-term opportunity that we see ahead,” Sisco added.

Workday stock forecast

Twenty-one analysts forecast the average price in 12 months at $228.86 with a high forecast of $296.00 and a low forecast of $140.00. The average price target represents a 5.65% increase from the last price of $216.63. From those 21 analysts, eleven rated “Buy”, nine rated “Hold” and one rated “Sell”, according to Tipranks.

Morgan Stanley gave a target price of $295 with a high of $385 under a bull-case scenario and $125 under the worst-case scenario. Workday had its target price raised by analysts at Cowen and Company to $250 from $190 and Stifel increased it to $227 from $190.

Other equity analysts also recently updated their stock outlook. Monness Crespi Hardt raised their target price to $280 from $215, Deutsche Bank upped their price objective to $220 from $190, Needham raised target price to $260 from $200, Evercore ISI increased their target price to $290 from $205, Barclays upped it to $220 from $162, JP Morgan raised target price to $250 from $200, Jefferies increased to $250 from $195 and RBC raised their target price to $280 from $220.

We think it is good to buy at the current level and target $250 as 50-day Moving Average and 100-200-day MACD Oscillator signals a strong buying opportunity.

Analyst view

“Workday is taking share in the large HCM/ERP market that is gradually shifting to the cloud with a disruptive SaaS platform. Our analysis suggests Workday is a LT share gainer in this space and can continue to grow its premier enterprise customer base globally while penetrating a large mid-market opportunity,” said Keith Weiss, equity analyst at Morgan Stanley.

“Furthermore, we see an attractive rev/customer growth opportunity as the company continues to develop its product portfolio and upsell sales motion. In a very expensive growth software stock landscape, we retain confidence in stories where durable/improving growth and improving margins can drive positive revisions in earnings and FCF – WDAY fits this description, keeping us Overweight shares,” Weiss added.

Upside and Downside risks

Upside: 1) Shift upmarket for the financials module greater than expected traction. 2) Shift downmarket for the HCM module gains more traction than expected. 3) Upsell motion develops faster than expected – highlighted by Morgan Stanley.

Downside: 1) Competition from legacy vendors and/or competing SaaS offerings. 2) Faster growth and higher investments further slow path to profitability. 3) Financials module does not gain traction.

This article was originally posted on FX Empire