Workday Analysts 'Worried About A Bubble'

In a report published Thursday, Brean Capital analysts maintained their Hold rating on Workday, Inc. (NYSE: WDAY). Although the analysts expect the company to report a marginal upside to its 1Q16 results, it is unlikely to be the usual beat and raise that Workday typically posts.

"Furthermore, we are incrementally concerned about a potential bubble during the next several quarters where HCM may slow before Financials pick up. As a result, we are advising investors to trim positions and look to add lower," the analysts stated.

Regarding the Q1 results, the analysts expect upside of about 4-5 percent in both reported billings and revenues. The analysts also expect the company to marginally raise it guidance for FY16. "However, we believe a beat and raise of a larger magnitude is priced in at the current valuation," according to the Brean Capital report.

While Workday offers superior technology in the HCM Saas marketplace, the increasing competition over the last few months have been elongating the company's sales cycle. In addition, given that the company prices most of its international contracts in U.S. dollars and given the strength in the U.S. dollar, Workday is likely to appear expensive, which would negatively impact TCO.

"While we remain convinced that ERP will shift to the cloud, we think that Workday is still ~18 months away from being a robust enough product offering to gain meaningful share of its potential customers," the analysts added.

The analysts also believe that given the company's corporate structure, M&A is highly unlikely at present.