Analysts Mixed On Workday's Outlook

Workday Inc WDAY reported Tuesday an earnings and revenue beat in its second-quarter results, but management's guidance of lower margins, partly due to the $1.5 billion acquisition of business-planning company Adaptive Insights sent the stock lower.

The Analysts

Morgan Stanley's Keith Weiss maintains an Overweight rating on Workday with a price target lifted from $145 to $154. Stifel's Brad Reback maintains Workday at Hold with a price target lifted from $115 to $150.

Shares of Workday were trading lower by 6.7 percent to $146.15 at time of publication.

Morgan Stanley: Durable Growth Ahead

Workday's earnings report was highlighted by billings growth which rose 35 percent year-over-year, Weiss said in a note. The report should give investors sufficient confidence that a "durable" 30 percent or more topline growth is likely for three key reasons.

1. The mid-market for Human Capital Management (HCM) and Financials should see momentum, especially from the addition of 3,500 mid-market customers as part of the Adaptive acquisition.
2. The analyst said Workday is now in a better position to upsell new products and services to large-enterprise HCM customers. Management is likely to offer more commentary on new opportunities during its upcoming Analyst Day presentation on October 2.
3. Workday's ability to target new clients in the "CFO's office" improved notably with the combination of a mature Financial Planning solution as part of the Adaptive acquisition and its Core Financials Suite.

Stifel: Premium Valuation Remains

Workday's earnings was "solid" and investors should be happy with subscription revenue driving over 75 percent of the quarter's top-line beat despite a tough comparison, Reback said in a note. Other encouraging metrics include an operating margin beat of 10.1 percent versus expectations of 9.9 percent and a guided range of 9 to 10 percent despite incremental costs associated with the Adaptive acquisition.

There were two "potential digs on the quarter," including only a modest billings beat of $739.9 million versus expectations of $735.1 million and a moderation of subscription backlog growth from 30 percent in the prior quarter to 25 percent, Reback said.

Workday has reported several consecutive quarters of solid results, but Reback said the majority of growth ahead will come from its core HR offering as the adoption of cloud-based solutions hasn't inflected yet and the timing remains unclear. Coupled with the stock trading in-line with its large cap SaaS peers at more than 10 times 2020 estimated EV/recurring revenue, investors may want to consider sitting on the sidelines for now.

Photo courtesy of Workday.