Don’t Run After the Rally in WDAY Stock Just Yet

Software provider Workday (NASDAQ:WDAY) has been on the rise alongside the wider market over the past two days. Shares of WDAY stock are up 12% since Monday’s lows near $125 as investors return to the market in force.

Don't Run After the Rally in WDAY Stock Just Yet

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But is it worth chasing gains on Workday stock or is this rally too fragile in the current market? Despite the market stringing together two days of gains on the promise of federal funds, most are still expecting a lot of volatility in the days ahead. Here’s a look at where Workday could be heading next.

The Case for WDAY Stock

Workday had been trading significantly lower than its July 2019 highs for months before the coronavirus became part of the equation. Investors abandoned the stock after management announced slowing growth rates in its Human Capital Management products. The firm’s fourth-quarter earnings revealed subscription revenue growth came in at 30% for the full year, but projections for fiscal 2021 expect HCM subscription revenue growth to be in the high teens.

Part of that is due to the fact that Workday is maturing— growth rates above 30% can’t continue forever. In the absence of that subscription growth, investors should be looking for profitability, something Workday did deliver.

Then there’s the fact that Workday relies on a subscription-based model, which will provide a steady, dependable revenue stream.

Why Workday May Not Be Your Best Bet

In the current climate where a recession looks inevitable, it’s important to consider the risks a software firm like Workday faces. In an effort to suss out the impact of Covid-19 on software firms, Credit Suisse outlined the potential risks the industry faces.

Workday ticks several high-risk boxes on Credit Suisse’s outline. Among the most worrying factors is the criticality of Workday’s offerings. If the macro environment continues to decline, businesses will be forced to make budget cuts eliminating non-essential spending. According to Credit Suisse analysts, Workday’s suite of products is unlikely to fall under critical processes worth saving.

Other risks include the firm’s dependence on expansion to drive future growth and its “high-touch” sales process.

Why WDAY Shares Aren’t a Steal

While Workday’s overall growth story outside of the coronavirus crisis is a strong one, I don’t think right now is the time to buy shares. With all the uncertainty that lies ahead, investors who are ready to start buying should be looking at cash-rich companies with strong positions.

Now is a great time to upgrade your portfolio with a basket of high-quality stocks that have previously been too expensive to consider. Workday may have fallen into that category when it was trading at $125 per share, but at $144 per share, I’d say it’s not a rally worth chasing.

The current rally is precarious and based heavily on the relief that government stimulus has offered. The market’s euphoria will most likely wear off as more bad news hits the airwaves in the weeks ahead.

More Buying Opportunities to Come

While the market’s stunning recovery over the past few days has certainly injected some optimism back into Wall Street, the battle against coronavirus is long from over. The economic impact that the virus will have on the world is still unknown and there is likely more bad news on the horizon as the number of cases in the U.S. continues to grow at an alarming rate.

History shows that the market will probably suffer a few more ups and downs before finally getting onto a steady upward trajectory, making it worthwhile to keep a level head. Now’s not the time to jump headfirst back into the market— especially not to chase WDAY stock’s rally.

The Bottom Line on Workday

There’s no reason to completely discount WDAY stock, especially considering the company’s underlying business looks strong. However, I think there are better opportunities to be had in stocks like Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), Disney (NYSE:DIS) and McDonald’s (NYSE:MCD). If you believe in Workday stock’s long-term growth story, put it on your watch list because there are likely better entry points coming in the days ahead.

Laura Hoy has a Finance degree from Duquesne University and has been writing about financial markets for the past 8 years. Her work can be seen in a variety of publications including InvestorPlace, Benzinga, Yahoo Finance and CCN. As of this writing Laura Hoy did not hold a position in any of the aforementioned securities.

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