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Workday: Stock Has Likely Bottomed, Presenting A Buying Opportunity

• Workday reported Q1 revenue and earnings beating expectations, with a focus on expanding TAM in the public sector and international markets.
• The company continues to build its partner ecosystem by adding Google Cloud Partners in Q1, as it accelerates its pipeline and drives higher ACV per customer.
• Meanwhile, it rolled out the general availability of its AI Marketplace, giving customers access to AI solutions from Workday and its partners, thus deepening adoption and monetization opportunities.
• Although the company faces increasing deal scrutiny as businesses are cautious, I believe that given its growth drivers and strong fundamentals, it is attractively priced to drive upside.

John M Lund Photography Inc

Introduction & Investment Thesis

Workday ( NASDAQ: WDAY ) is a cloud-based software company that provides solutions for financial management, spend management, human capital, planning, and analytics. I initiated a “hold” rating on the stock on March 31st, and since then, the stock has declined close to 20%, underperforming the indices. Although I was optimistic about the company’s growth levers of international expansion and its partner ecosystem along with its strong financial discipline, I rated the stock a “hold” because I believed that its future growth estimates were priced into its valuation, with little upside left for long-term investors.

The company reported its Q1 FY25 earnings , where revenue and earnings grew 18.1% and 30% YoY, respectively, beating estimates. During the quarter, the company continued to acquire new customers while deepening adoption among existing ones, with particular strength in the public sector and healthcare verticals. Personally, I like that the company is focusing on expanding its total addressable market (“TAM”) in select verticals such as the public sector as well as international markets to gain market share by leveraging its partner ecosystem, a culture of product innovation, and the smart acquisition of HiredScore.

Although the management warned against increasing deal scrutiny, which is something we are observing across the whole software sector, I believe that Workday is well positioned in the long term, given its focus on its go-to-market engine, partner ecosystem, product innovation, and financial discipline. Therefore, I am updating my rating from “hold” to "buy," as I believe that the recent investor pessimism has created an attractive buying opportunity to drive substantial upside over the long run.

Q1 Revenue & Earnings beat expectations

Workday reported its Q1 FY25 earnings where revenue grew 18.1% YoY to $1.99B, while non-GAAP operating income grew 30% YoY to $515M with an improvement of 240 basis points in margins to 25.9%. During the quarter, the company continued to make progress on its growth initiatives to expand its TAM as it acquired and deepened adoption of its solution suite among customers with particular strength in healthcare, public sector, financial services, and professional services verticals with growing ACV.

Q1 FY25 Earnings Presentation: Growing Revenue and Profitability

Focused on expanding TAM in the public sector and international markets while growing its partner ecosystem

When it comes to expanding its TAM, Workday closed a strategic deal with Defense Intelligence Agency (“DIA”), where it will support DIA to accelerate recruitment and onboarding efforts to create a trusted and agile workforce, thus unlocking market opportunity in the federal government, which will allow it to grow their pipeline in the coming quarters and years. In addition to DIA, the company also closed full platform wins with the cities of North Las Vegas, Milwaukee, Palm Bay, and more.

At the same time, the company remains focused on expanding globally, where they held events such as Workday Elevate across APAC, Japan, and EMEA in order to bring together prospects and existing customers to generate new sales pipeline, along with building their partner ecosystem to grow in breadth and depth. During the earnings call , the management highlighted that they had over 200 co-sell and referral partnerships as they helped close more ACV in Q1 than in all of FY24. Plus, they also signed Google Cloud Partners (NASDAQ: GOOG ) in Q1, while they continue to expand their relationship with Amazon AWS (NASDAQ: AMZN ), billing over $75M of active ACV pipeline and simultaneously forming a new reseller agreement with Kyriba to help Workday customers integrate with a network of over 1000 banks.

Robust AI product roadmap to deepen adoption

Finally, the company continues to deliver robust AI capabilities, which are natively embedded in all of their applications, with over 50 AI use cases live in production and 25 generative AI use cases on their product roadmap to help their customers drive productivity and efficiency gains. For instance, their Talent Optimization solution is an AI-first SKU that has seen strong attach rates on new deals, and during the earnings call, the management said that over half of their core customer base has licensed the product, making it the fastest growing solution.

During their Developer Conference, the company also unveiled several new AI services via Workday AI Gateway, while rolling out the general availability of Workday AI Marketplace, which will give its customers access to AI solutions while giving their partners a launch pad to co-innovate and build trusted AI solutions, thus expanding the breadth of its solutions and monetization opportunities.

Plus, I believe their acquisition of HiredScore will hugely enhance Workday’s suite of HR solutions, allowing it to offer its customers improved recruiting efficiency and candidate fit while leveraging HiredScore’s existing customer base to target new customer segments.

Increasing deal scrutiny could spell trouble for its growth prospects and profitability

However, one of the areas of concern that the management flagged during the earnings call is that it is facing increased deal scrutiny compared to previous quarters, with customers committing to lower headcount levels on renewals compared to original expectations. This is a common theme that we have been seeing in software earnings this quarter, where their sales cycles are getting longer, and while the management has been partly attributing it to the state of the overall macroeconomic conditions, it is also possible that software vendor budgets are getting cannibalized by AI projects. Therefore, software vendors, such as Workday, have to increasingly prove that they can bring their customers into the future AI paradigm; otherwise, they are facing increasing friction in the procurement process, as businesses are cautious about locking in long-duration contracts, given the pace of innovation in the genAI landscape. If we indeed start to see a decline in Net Revenue Retention Rate (“NRR”) below the 100% mark, coupled with a decline in new customer wins, that will spell trouble for the company’s growth trajectory and profitability landscape.

Changing rating from “hold” to “buy”

Looking forward, the company is expected to grow its Subscription revenue by 17% in FY25 to $7.7B and as per consensus estimates , its full year revenue should grow 15.5% YoY to $8.4B. Since the management has not made any changes to its projections since its Investor Day Presentation , I will go ahead with the assumption that it can grow its total revenues by at least 16% YoY annually until FY27, with a total revenue of $11.27B. This is under the assumption that its short-term pain of excess deal scrutiny will abate, especially given its product roadmap with AI along with TAM expansion opportunities in select verticals such as the public sector and healthcare, as well as its international markets, which it is well positioned to penetrate given its partner ecosystem.

From a profitability standpoint, the management expects to generate a non-GAAP operating margin of 25% in FY25, assuming it is able to maintain that over the next 2 years into FY27, it should generate $2.8B in non-GAAP operating income, as it unlocks economies of scale from higher ACV customers, especially by leveraging its partner ecosystem as well as higher attach rates on its AI-led solutions, allowing it to streamline their operating expenses. This will be equivalent to a present value of $2.3B when discounted at 10%.

Taking the S&P 500 as a proxy , where its companies grow their earnings on average by 8% over a 10-year period, with a price-to-earnings ratio of 15-18, I believe that Workday should trade at approximately twice the multiple given the growth rate of its earnings during this period of time. This will translate to a PE ratio of 34, or a price target of $298, which represents an upside of 36%.

Author's Valuation Model

Plus, Workday is projected to grow at a faster rate in the mid teens over the next 3 years, compared to some of its deep-pocketed competitors, which include SAP (NYSE: SAP ) and Oracle (NYSE: ORCL ), while simultaneously trading at a lower forward PE ratio compared to SAP while trading at par in relative terms to Oracle.

My final verdict and conclusions

Although increased deal scrutiny and longer sales cycles are dampening investor confidence in the short term, I believe that it has created an attractive opportunity to initiate a long-term position in the stock to drive substantial returns over a 3-year investment period. I believe this is the case because the company has strong fundamentals and growth drivers, such as the public sector and international markets, where it is successfully expanding given its robust partner ecosystem and AI-led product innovation. As a result, I will rate the stock a “buy”.

This article was written by

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in WDAY over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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The promises of conservation: Producing nature on Jeju Island, South Korea, through designated areas

Jeju Special Self-Governing Province (Jeju Province), South Korea, is an archipelagic province that is unsurpassed worldwide for its number of IDAs. These designations, alongside the national park, have transformed relationships with nature, promising international prestige and environmentally friendly development. Through discourse analysis and interviews with policymakers, provincial officials, village heads, ecotourism consultants, and site guides, this thesis interrogates the role of Designated Areas (DAs) in producing nature in various distinct ways in the province. This production entangles nature further in dominant socio-economic processes through various ecotourism projects that propagate ideologies of nature specific to the present and historical eras. Particularly due to the country’s recent liminal existence as a rising economy, South Korea, as part of the wider East Asian region, has sometimes been overlooked by political ecologists who have focused on developing and, more recently, advanced economies. This thesis additionally adds to the literature on ‘actually existing neoliberalism’ (Brenner and Theodore 2002) by identifying the role of domestic structures and institutions in propagating market-oriented DA governance alongside norm-disseminating international networks. Rather than producing nature in a singular form, the national park and IDAs raise tensions around value and usage reflecting the adoption of neoliberalisation elsewhere. Through the national park designation campaign in the 1960s and the IDA campaigns in the 2000s, designation advocates pledged to bring prosperity and nature-friendly development to the province. The legacies of developmentalism are particularly evident in the use of market-oriented ecotourism projects to activate nature through technocratic interventions. Socio-economic flux and the remnants of developmentalism produce a form of ecotourism that is brand-oriented yet functions to build community cohesion and reconnect villagers with nature following rapid social change. Despite the limited success of these brand-oriented ecotourism programmes, however, far from challenging unsustainable development, they exist in complementarity with it.

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