Workday (WDAY) is a leading provider of enterprise cloud applications for finance and human resources functions, explains growth stock expert Hilary Kramer, editor of GameChangers.
The company delivers financial management, human capital management, planning and analytics applications that have been designed for the world’s largest companies and public institutions. Its customers include 60% of the 50 largest companies in the world.
Workday applications are delivered through cloud computing, which reduces its customers’ need for hardware and enables easy installation of biannual upgrades. The company’s software is sold on a subscription basis, typically with contract terms of three years or longer.
Its subscription fees were largely based on the size of the customer’s workforce. This allows the company to realize recurring revenues, which have proven to be very popular with investors who have significantly bid up software stocks in recent years.
While the pandemic is causing some disruptions, its long-term impact will encourage more companies to move their information technology services off of their premises and into the cloud, which would benefit WDAY.
With subscription revenue backlog up 22.3% over the past year, I believe that earnings per share estimates of $2.55 in the current fiscal year, up from $1.88 last year, and $3.00 next year, are realistic.
While the stock is not cheap at 70X forward estimates, this valuation is not out of line, considering the presence of very low interest rates and the fact that many enterprise software companies are selling for even higher multiples. As investors gain confidence in 2021’s multiples, the stock should do well.
