After the close on Dec. 3, Workday (NASDAQ:WDAY) reported third-quarter earnings results for its fiscal 2020 year. The quarter was solid, but it wouldn’t appear that way when glancing at WDAY stock.
Shares ended lower by 4.7% in the first trading session after the report. That’s despite a top- and bottom-line beat and solid guidance. So what could have possibly dinged the stock, and more importantly, is the selloff a buying opportunity for investors?
Workday Earnings
Earnings of 53 cents per share easily topped analysts’ expectations by 16 cents. Revenue grew 26.2% year-over-year to $938.1 million and beat estimates by roughly $17.5 million.
For guidance, the company expects fourth-quarter subscription revenue of $828 million to $830 million. That’s ahead of consensus expectations, which stand at $826.8 million. After third-quarter results that beat expectations and estimates for a solid fourth quarter, management raised its full-year 2020 outlook. They now expect subscription revenue in the range of $3.085 billion to $3.087 billion, up from $3.06 to $3.07 billion.
A beat-and-raise quarter followed by a near-5% correction — what gives?
Management’s outlook for 2021 is the culprit. They expect subscription revenue growth of roughly 21%, which is short of consensus expectations for 23.6%.
It may seem silly to sell a stock in the face of mostly good news. Remember though, the stock market is a forward-looking mechanism. It doesn’t care about third-quarter earnings all that much. It wants to know what to expect going forward. While management’s Q4 and full-year outlook were solid, realize that this is basically one quarter of better-than-expected growth, while their 2021 forecast is four quarters of worse-than-expected growth.
Trading WDAY Stock
Source: Chart courtesy of <a href="stockcharts.com" target="_blank" rel="noopener noreferrer">StockCharts.com</a>
The mild post-earnings correction didn’t deal a devastating blow to the charts, but it certainly didn’t do WDAY stock any favors.
Before Workday reported earnings, shares were rejected from the declining 100-day moving average. That fall sent shares down to the 50-day moving average, where they rallied ahead of earnings. The rebound looked encouraging, as it came at a critical moving average, as well as uptrend support (blue line).
However, once earnings were out, WDAY stock took a tumble — blowing right through the 50-day moving average and uptrend support. The reaction wasn’t favorable for bulls, but at least the stock now has a well-defined post-earnings range.
A move below Wednesday’s low (Dec. 4) and the 23.6% retracement near $162, and a drop down to $155 may be in the cards. Above Wednesday’s high would be a sign that investors can go long. Not only would that put the stock over its post-earnings high, but it would also allow WDAY stock to reclaim the 50-day moving average and uptrend support.
From there, a rebound up to the 100-day moving average is technically possible. So keep it simple: Below the 23.6% retracement is more bearish and could send shares to $155. A close above $168.50 is more bullish and could send shares higher.
Bottom Line on Workday Stock
So where does all of this leave Workday stock? It’s certainly a mixed picture.
The last quarter was great and the next quarter should be solid. Management’s view for the next fiscal year is okay, but below expectations. That discount is working through the stock price, which again, leaves the charts for WDAY stock in a mixed position.
They’re not great, but the stock isn’t horrendously bearish, either.
At the end of the day, WDAY stock may be too expensive for some investors — particularly given the mixed situation it’s in. Near $166 per share, Workday trades at roughly 93 times this year’s expected earnings. Analysts expect 30% earnings growth this year and 24% growth next year.
If that growth comes to fruition, it still leaves Workday stock trading at 75 times fiscal 2021 earnings. Admittedly, it’s not all about earnings — otherwise a massive number of stocks would not command the types of valuations that they do. It helps that WDAY stock is profitable and has positive cash flows that are accelerating at an impressive pace.
But it seems as if maturing cloud companies — and I say that with a grain of salt, because it’s hard to consider companies with 20%-plus revenue growth as “old” — are going through some growing pains. That includes Salesforce (NYSE:CRM), too.
While Workday earnings were a bit underwhelming when it comes to guidance, let’s see if the stock can hold up. Over $168.50 improves the narrative.
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.
