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Workday vs.Oracle: Which SaaS Stock is a Better Pick?

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·6 min read
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The cloud enterprise application software market is experiencing an upswing as enterprises move from on-premise models to cloud-based models. Cloud-based enterprise applications reduce the organization’s investments in alternative Information Technology (IT) resources.

According to a KBV Research report, the global cloud enterprise application market could be worth $143.5 billion by 2023.

Using the TipRanks Stock Comparison tool, let's compare two cloud-based enterprise application companies, Workday and Oracle, and see how Wall Street analysts feel about these stocks.

The author is neutral about both Workday and Oracle.

Workday (WDAY)

Workday is a provider of software-as-a-service (SaaS) solutions, including enterprise cloud applications for human resources and finance. The company primarily generates revenues through subscription and professional services. Subscription services revenues are fees-based revenues that give WDAY’s customers access to its cloud applications.

In Q2 FY22, the company generated subscription revenues of $1.11 billion, a rise of 19.5% year-over-year. Subscription revenues made up around 88.1% of the company’s total revenues of $1.26 billion in Q2.

Workday had a strong second quarter, with revenues of $1.26 billion, up 18.7% year-over-year and beating consensus estimates of $1.24 billion. Diluted net income per share landed at $1.23, above consensus estimates of $0.78.

WDAY’s professional services revenues include fees for training, optimization, and deployment services. This business generated revenues of $147 million in Q2.

Robynne Sisco, Workday’s President and CFO said, “We delivered an incredibly strong Q2, driven by exceptional execution against a rapidly improving backdrop. As a result, we are raising our fiscal 2022 guidance for subscription revenue to a range of $4.500 billion to $4.510 billion, growth of 19%. We expect third-quarter subscription revenue of $1.156 billion to $1.158 billion, 20% growth at the high end. We are also raising our fiscal 2022 non-GAAP operating margin guidance to 21.0%.”

At the end of Q2, WDAY had a total subscription revenue backlog of $10.58 billion, a rise of 23.1% year-over-year. Over 24-months, subscription revenue backlog was $6.88 billion, up 19% year-over-year. (See Workday stock chart on TipRanks)

Subscription revenue backlog is the amount that is billed to the customer, but the revenue has yet to be earned by WDAY.

According to William Blair analyst Matthew Pfau, while the management anticipates the 24-month subscription revenue backlog to rise by 19% in Q3, “the amount of renewals in fiscal 2022 is flat relative to fiscal 2021, which is causing a several point headwind to growth in this metric and making it not necessarily reflective of the strength in new bookings.”

The analyst reiterated a Buy on the stock following the Q2 results. Pfau pointed out that the management expects an acceleration in demand in the second half of the year, as indicated by its subscription revenues guidance for FY22.

One of the highlights for the company in Q2 was the approximately 50% growth in annual contract value (ACV) in WDAY’s Adaptive Planning business. The company also signed one of its largest planning deals in its history in Q2.

Pfau was of the opinion that these deals “should provide opportunities down the road to sell core financials and other products as well.”

Turning to the rest of the Street, consensus is that Workday is a Strong Buy, based on 15 Buys and 3 Holds. The average Workday price target of $302.59 implies an approximately 11.5% upside potential from current levels.

Oracle (ORCL)

Oracle has been a giant in the cloud-based enterprise application market and offers application and infrastructure models that range from cloud-based, on-premise, and hybrid IT deployment.

Oracle reported Q4 revenues of $11.23 billion, a growth of 8% year-over-year, beating the consensus estimate of $11.04 billion. Adjusted EPS came in at $1.54, up 29% year-over-year and ahead of the consensus estimate of $1.31.

According to Monness Crespi Hardt analyst Brian J. White, Oracle’s strong Q4 earnings along with earnings from other cloud providers offered “a glimpse into the potential demand environment for Oracle in H2:CY21.”

The analyst was of the opinion that ORCL was “well positioned to benefit from accelerated digital modernization trends with more workloads migrating to the cloud.”

Indeed, at the company’s earnings call, Oracle’s management was bullish on the “fast-growing cloud business” and expects it to become “a larger portion of our total revenue.” (See Oracle stock chart on TipRanks)

In fact, Oracle’s CEO Safra Catz said on the earnings call, “I see total revenue for fiscal 2022 growing faster than fiscal '21, with constant currency revenue growth somewhere in the mid single-digits. We also see cloud as being fundamentally a more profitable business compared to on-premise.”

White has a bullish outlook on ORCL with a Buy rating, and raised the price target from $93 to $113 (26.3% upside) on the stock earlier this month.

The analyst also believes that Oracle has a shot at earning some incremental revenues from the U.S. Department of Defense’s (DoD) Joint Warfighter Cloud Capability (JWCC) program, “albeit on a much smaller scale compared to the world’s two largest public cloud providers,” namely, Microsoft (MSFT) and Amazon (AMZN).

In July this year, the U.S. DoD canceled the Joint Enterprise Defense Infrastructure (JEDI) cloud solicitation program. However, the DoD replaced this program with the JWCC, which “will be a multi-cloud/multi-vendor Indefinite Delivery-Indefinite Quantity (IDIQ) contract.”

The DoD press release also mentioned that for its enterprise-wide unmet cloud needs, it “intends to seek proposals from a limited number of sources, namely the Microsoft Corporation (Microsoft) and Amazon Web Services (AWS),” but will continue to engage with the industry and evaluate other cloud-service providers, too.

According to analyst White, other key positives for the stock include its unveiling of new cloud innovations like MySQL Autopilot for its MySQL HeatWave Service, and new government accreditations.

In June this year, Oracle achieved FedRAMP High Provisional Authority to Operate (P-ATO) from the Joint Authorization Board (JAB) and Defense Information Systems Agency (DISA) Impact Level 5 (IL5) accreditation for infrastructure as a service (IaaS) and platform-as-a-service (PaaS). These accreditations will result in more of ORCL’s cloud services being available to government organizations.

Turning to the rest of the Street, consensus is that Oracle is a Hold, based on 4 Buys, 12 Holds, and 1 Sell. The average Oracle price target of $83.13 implies an approximately 7.1% downside potential from current levels.

Bottom Line

While analysts are bullish about Workday, they remained sidelined on Oracle.

It seems that Oracle is targeting new customers and is looking at gaining a share of the pie when it comes to cloud-based services for government agencies. Yet many analysts remain bearish on the stock.

Meanwhile, Workday’s subscription services seem to be gaining momentum, making many analysts optimistic about the stock.

Disclosure: At the time of publication, Shrilekha Pethe did not have a position in any of the securities mentioned in this article​.

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