With Workday Shares Up 26% YTD, BofA Projects Further Upside

Workday Inc WDAY is likely to have a solid beat-and-raise quarter when it reports its fiscal 2018 fourth-quarter results after the market close Tuesday, said a Bank of America Merrill Lynch analyst. 

The Analyst

BofA's Kash Rangan reiterated a Buy rating on Workday shares and raised the price target from $134 to $141, suggesting roughly 11-percent upside from current levels.

The Thesis

A strong beat on Q4 revenues, acceleration in billings to high 20s, continued upside in margins and stronger fiscal 2019 free cash flow margins could drive stock upside, Rangan said in a Monday note.

Although investors are likely to look for traction in core financials to justify the premium multiple, the analyst said he believes core strength is not required for the stock to work as long as human capital management and financial modules continue to grow.

Workday is enjoying strength in its core HCM enterprise; higher retention and more deal wins versus SAP SE (ADR) SAP and Oracle Corporation ORCL; strength in education and with universities; and continued strength in financial modules vs. core financials, Rangan said, citing channel checks. 

BofA expects re-acceleration in net new deferred revenues in th fourth quarter and the first quarter of 2019 after the metric slowed to 23 percent year-over-year growth in Q1. 

"We also see [the] 25-percent revenue growth guide [as] likely conservative, driven by our view of improving ST deferred revenues," Rangan said. 

With Workday's fundamentals remaining strong, BofA said it is rolling over its valuation model to the estimated earnings for fiscal 2023.

BofA expects Workday to "break out" after Tuesday's earnings report if billings growth re-accelerates to the high 20s.

The research firm maintained a fiscal 2018 EPS estimate of $1.02 and raised its fiscal 2019 estimate to $1.58.

As such, the firm maintained its FY18 earnings per share estimate at $1.02, but raised its FY19 estimate by 3 cents to $1.58.

The Price Action

Workday shares are up about 53 percent over the past year.

Related Links:

Needham Upgrades Workday Ahead of Q4 Report

5 Reasons Why KeyBanc Upgraded Paycom

Photo courtesy of Workday.