Workday's Q4 'Good,' But Stock Well Priced; Bernstein Downgrades To Market Perform

Bernstein downgraded Workday Inc WDAY to Market Perform from Outperform, despite strong fourth quarter results, saying the stock is fairly priced.

The downgrade comes after Workday beat estimates for revenue, billings and operating margin and EPS. FY 2018 guidance was increased slightly due to the fourth quarter beat.

Workday guided FY2018 revenue growth at 27-29 percent. But, Bernstein was looking for larger increase in guidance as the company closed numerous large deals including BP plc (ADR) BP, Deutsche Bank AG (USA) DB, Dow Chemical Co DOW and Wal-Mart Stores Inc WMT.

Related Link: Why Workday's Q4 Beat Is Still Being Called A 'Disappointing' Quarter

The company barely increased its FY2018 revenue growth expectations, implying the opportunities for the remainder of the year are smaller.

“We continue to be positive on the name but we believe that the stock is fairly priced, even after today's ~8% drop, given the expensive valuation compared to peers, slowing growth and the dissipation of future upside from the change in revenue recognition,” analyst Mark Moerdler wrote in a note.

Following are the key factors that triggered a downgrade from Moerdler:

1) “YoY revenue growth is slowing significantly.”

2) “YoY revenue guidance did not increase significantly after multiple wins and a more bullish management team.”

3) “Investors expected ~5% revenue tailwind in FY19, as the effect of flexible billings expires. With ASC 606 decoupling billings and revenue, there should have been a tailwind in FY18, which is not reflected in guidance.”

4) “Changes to reporting and adoption of FASB 606 decrease clarity on results and guidance.”

5) “The company is moving away from billings as a key metric even though many investors use it as a leading indicator of future growth, decreasing transparency in the company's future prospects.”

At last check, shares of Workday rose 1.94 percent to $84.50. The analyst raised his target price to $91 from $84.