A Closer Look At Workday’s Valuation
Our valuation methodology suggests that Workday (NASDAQ:WDAY) is slightly undervalued by the market (current market price $131). Our price estimate of $147 is based on a Price/Sales multiple of 11.5, slightly lower than FY’18 levels. In previous years, the company’s P/S ratio stood at 10.5 through FY’16 and FY’17 but surged to 12.3 in FY’18. We expect this to normalize to around 11.5, in line with industry trends. Further, we expect Workday’s revenue to continue to increase, albeit at lower than historic rates due to the high base factor. We forecast Workday’s net revenue to increase by 25% to $2.7 billion. We have summarized our expectations on our interactive dashboard platform. If you disagree with our forecasts, you can change the key drivers – such as expected segment revenue and price-to-sales multiple – for Workday to gauge how changes will impact its valuation.
Both Segments To Drive Revenue Growth
Subscription services revenues surged 40% through FY’17 and FY’18 (ended January) driven by an increased number of customer contracts. Revenues increased from $920 million in FY’16 to $1.3 billion in FY’17. This further increased to $1.8 billion in FY’18. We expect Workday’s subscription services revenues to increase at a more conservative rate of 28% on a y-o-y basis to under $2.3 billion in FY’19.
Similarly, professional services revenues have increased at around 22-23% in recent years. Professional services revenues increased from $236 million in FY’16 to $284 million in FY’17 to $355 million in FY’18. We forecast professional services revenue growth to slow down slightly to around 15% through FY’18. As a result, we forecast revenues to stand at just over $400 million in FY’19. Consequently, the net revenue for Workday for the full year is expected to increase 25% to $2.7 billion, per Trefis estimates.
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