The shares of Workday (NASDAQ: WDAY) have gained 27% since February 2020, almost comparable to the market leader Automatic Data Processing (NASDAQ: ADP). In recent years, Workday’s revenues have grown at an annual rate of 26% pushing investor confidence in the stock. Interestingly, Workday’s current valuation multiple (P/S) stands lower than pre-Covid levels as observed in late-2019 despite the continued growth, even during the pandemic. Comparing a slew of factors such as historical revenue growth, returns, and risk, Trefis believes that Workday stock is poised for more gains. Workday has a higher revenue growth expectation than ADP, indicating Workday’s improving market share in the payroll processing industry. Our dashboard Automatic Data Processing vs. Workday: Industry Competitors, But Workday Is A Better Bet details the fuller picture, parts of which are summarized below.
1. Revenue Growth
Workday’s growth has been much stronger than ADP in recent years, with Workday’s revenue expanding at an average rate of 26% per year from $2.1 billion in FY2018 to $4.3 billion in FY2021, versus ADP’s revenue which grew by 4% per year from $13.2 billion in FY2018 to $15 billion in FY2021.
- Workday recognizes a single operating segment as cloud applications, with Subscription services and Professional services as two revenue categories. Revenues from subscription services have more than doubled in the past four years and account for almost 85% of the company’s top line.
- Subscription services revenue include recurring fees from cloud applications, which are used for financial management, spend management, human capital management, and analytics.
- ADP is the industry leader in the payroll processing business with almost a 16% market share in U.S. Thus, its business growth depends on macroeconomic factors such as GDP, employment statistics, wages, etc.
- ADP categorizes its services into two parts, Management Solution (Employer Services) and Professional Employer Organization. Management Solutions segment provides key human capital management services including payroll processing, tax administration, HR solutions, and retirement services. The PEO (professional employer organization) is a comprehensive employment administration solution where employees working for a client are co-employed by ADP and the client (known as worksite employees).
- ADP’s Employer Services and Professional Employer Organization segments contribute 70% and 30% of total revenues, respectively.
- While Workday’s strong growth has been driven by its cloud service applications, ADP has also been focusing on cloud business in recent years. (related: Should You Sell ADP Stock Post Earnings?)
2. Returns (Profits)
Given strong top line growth, Workday has been re-investing in its business by expanding its service offerings and workforce in recent years. Whereas, ADP has been consistently providing returns to investors as dividends and share repurchases.
- In FY2021, Workday reported an operating margin and net income margin of -5.8% and -6.5%, respectively. However, the operating cash margin stood at 30% as share-based compensation expenses accounted for 22% of the total operating costs. With $1.26 billion of operating cash, the company incurred $253 million of capital expenses and invested $988 million in marketable securities.
- In FY2021, ADP reported an operating margin and net income margin of 22% and 17%, respectively. The company generated $3 billion of operating cash on revenues of $15 billion at an operating cash flow margin of 20%. Subsequently, it invested $178 million in property, plant & equipment, repurchased $1.4 billion of common stock, and paid $1.6 billion in dividends.
Give the relatively low net debt obligations of Workday and ADP, both stocks do not have significant downside risk due to financial leverage.
- In FY2021, Workday reported $1.8 billion of total debt and $2.5 billion of cash & marketable securities on the balance sheet.
- Similarly, ADP reported $3 billion of total debt and $2.5 billion of cash & cash equivalents on the balance sheet.
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|S&P 500 Return||-2%||-2%||109%|
|Trefis MS Portfolio Return||-4%||-4%||276%|
 Month-to-date and year-to-date as of 1/12/2022
 Cumulative total returns since the end of 2016