Workday Inc. Stock Too Expensive At $190?

With a 68% rise since its low in March, at the current price of $191 per share we believe Workday Inc. stock (NASDAQ: WDAY) has reached its near term potential. Workday stock has rallied from $114 to $191 off the recent bottom compared to the S&P which moved 39%. Further, Workday stock is up about 20% from levels seen at the end of 2018, a little over a year ago.

Workday stock has also almost reached the level it was at before the drop in March, due to the coronavirus outbreak becoming a pandemic. This seems to make it appear fully valued as, in reality, demand and revenues will likely be affected this year.

Some of the rise over the last year came due to a 69% growth in revenues from 2018 to 2020 (Workday’s fiscal year ends in January), which combined with a 9% increase in outstanding share count, led to a 55% jump in revenue per share (RPS). Revenues soared as Workday brought on more and more clients, further helped by a steady rise in average fee per client.

Its P/S multiple, however, saw a decrease from 15.5x in 2018 to 12.6x in 2019, and has dropped marginally to around 12x currently. Further, we believe the stock is unlikely to see significant upside despite the recent rally, owing to the potential weakness from a recession driven by the Covid outbreak. Our interactive dashboard What Factors Drove 19% Change in Workday Inc. Stock between 2018 and now? has the underlying numbers.

Workday’s P/S multiple has changed from 15.5x in 2018 to 12x presently. We believe there is possible downside when the current P/S is compared to levels seen in the past years: P/S of 9x in 2016 and 10.5x as recently as 2017.

So what’s the likely trigger and timing for this downside?

The global spread of Coronavirus, and the resulting lock downs and quarantine means that a lot of businesses are struggling, and many will want to cut costs drastically. Due to this, Workday will find it difficult to acquire new clients, and it’s likely that some of their existing clients might also want to shift HR and payroll processing activities in-house, instead of outsourcing. We believe Workday’s Q2 ’21 results in August will confirm the hit to its revenue. It is also likely to accompany a lower Q3 2021 guidance.

Regardless, if there isn’t clear evidence of containment of the virus at the time of the earnings announcement, we believe the stock will see its P/S decline from the current level of 12x to 10.5x, which combined with a slight reduction in revenues and margins could result in the stock price shrinking to around $165.

While Workday Inc. stock doesn’t seem to have much near term upside, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That Could Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

Our dashboard forecasting U.S. Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture.
The complete set of coronavirus impact and timing analyses is available here.

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