Workday Inc (NASDAQ:WDAY) recently suffered a big loss, falling from $117 to $95 over just a few days. Unfortunately for WDAY stock, the company reported mixed earnings in the midst of a market rotation out of tech. That added fuel to the fire in WDAY’s 18% decline.
Was the fall unwarranted or is the stock’s bounce only temporary?
The Good
There are a lot of good things going on with WDAY stock. For starters, the company is edging closer to profitability. Gross margins continue to head in the right direction, registering about 70%. This figure has continually been moving from the lower left to the upper right. On a trailing basis, gross margins are at their highest point ever. So, that’s good.
Free-cash flow (FCF) is also moving in the right direction. On a trailing basis, the $310 million in FCF is roughly quadruple where it stood two years ago. Even though WDAY is not yet profitable, it’s good to see positive FCF. That tells us the business is solid.
More good news? Workday put together its fifth consecutive earnings and revenue beat. Last quarter, sales climbed more than 40% year-over-year. Fourth-quarter and current full-year (fiscal 2018) guidance came in ahead of expectations too. At the midpoint, management expects revenue of $572 million and $2.133 billion, respectively. That’s ahead of analysts’ forecasts calling for $557 million and $2.1 billion.
The Bad
That’s a lot of good news, so what took the stock down? Billings growth, which many use as an indicator for future revenue growth. Billings growth came in at just 25% last quarter, below Street estimates.
It’s not just the quarter, though. Guidance for FY 2019 (next year) pegs subscription billings at $2.25 billion. And even though it bumped its full-year subscription billings revenue to $1.781 billion for FY 2018, that represents “just” 26% growth YOY.
While that’s no small bump, we’re seeing a somewhat concerning slowdown in billings. For instance, each quarter this year has a lower YOY growth rate. That wouldn’t be an issue necessarily, if not for the valuation. While WDAY stock is not an earnings story (yet) it trades at 90 times forward earnings estimates. Further, Workday stock trades at 11 times sales.
For that price, we can’t have WDAY’s growth rates deteriorating so quickly.
WDAY Stock Chart
Looking at the chart, we see that WDAY stock has quickly (and forcibly) cut through its trend-line support. This level (now near $105) had continually served as the spring that sent WDAY stock higher on each decline since its mid-May breakout. The latest decline even sent Workday stock below its 200-day moving average.
Click to Enlarge
It was a damaging move, no doubt. The bounce back from $95 to $105 has been impressive, though. My concern is, can it last? While Workday initially gapped above this level on Dec. 8, it’s struggling to hold on. A close back below trend-line support would be bad news. If that’s the case, a retest of the 200-day MA and possibly its recent lows are certainly on the table.
The Bottom Line on WDAY Stock
Workday has a threatening, but not-yet-toxic chart. Its growth is slowing, but its business is great. So, what do we make of this company?
WDAY stock is not cheap, nor has it ever been. But it’s FCF-positive (a huge thumbs-up in my mind) and its gross margins are trending higher. Operating margins are heading higher as well. Given that more than 80% of the company’s revenue is subscription-based means that, as Workday continues to add sales, it should continue to build its list of repaying clients.
That’s an excellent business and it helps explain why FCF is moving higher. That said, the revenue growth engine is starting to show signs of slowing and that’s not great news for a company that trades with this high of a valuation. For as great of a company as Workday is — and it’s excellent one indeed — everything has a price.
If Workday stock fails to get back above trend-line support, wait for further consolidation at lower prices. For those that want to take a stab at it, do so if it reclaims this level of support. A stop-loss close to this level or at the 200-day MA can be used for those who want to give it more leeway.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
