Why Workday Stock (WDAY) Is Surging

Workday StockWhat’s Next for WDAY Stock?

Workday Inc (NYSE:WDAY) stock is packed into a crowded corner of the technology sector, yet it still manages to outperform expectations. Among other reasons, the firm’s willingness to throw a couple of elbows turned me bullish on Workday stock.

The business software company is going head-to-head with some of the biggest names in the tech sector. I’m talking about giants like Salesforce.com, Inc. (NYSE:CRM), Oracle Corporation (NYSE:ORCL), and even the titan of cloud services: Amazon.com, Inc. (NASDAQ:AMZN).

In taking on these behemoths, WDAY stock has built a “David-vs.-Goliath” narrative in which it plays the underdog. It is a brilliant piece of expectations-management that draws investors’ attention away from the red ink on their bottom line and refocuses it on revenues.

Why? Simple; the scrappy underdog gets to prove itself through phenomenal growth numbers, while the mature business has to deliver profits. That’s just how investors are hard-wired to approach investing. Only startups can run on the promise of growth.

That’s why it was encouraging to see Workday’s second-quarter earnings (announced on Wednesday). The company beat Wall Street forecasts with 34% revenue growth and 38% growth in billings. WDAY stock spiked seven percent as a reaction to the news.

Potential Stumbling Blocks for Workday Stock

That said, even the most promising of startups have to turn the corner at some point. Investors were starting to lose patience with Workday stock as the industry slowed.

To make matters worse, fewer analysts were bullish on WDAY stock. (Source: “Workday’s Price for Getting the Job Done,” The Wall Street Journal, August 25, 2016.)

“Buy” ratings dropped to 38% from 56% a year ago, suggesting that the company’s goodwill was running dry. Meanwhile, short sellers ramped up their bets against Workday stock in the hopes that its share price would come crashing down.

About 12% of WDAY stock was sold short ahead of this week’s earnings announcement, which was a sharp uptick from nine percent in January. Critics also pointed to Workday’s stock price relative to its forward-looking sales as being higher than its competitors.

There’s no point denying facts; that’s my motto. Workday stock is more expensive relative to future sales, but that’s not the full story. Context matters.

WDAY stock has been trending down relative to future sales for two years, despite meeting or exceeding its growth forecasts. That means the company is scoring wins on two fronts, but the Workday stock bears won’t talk about that too much.

But don’t take my word for it. Check out this chart:

Pay Gap

Management Steps In to Save WDAY Stock

Workday’s management noticed the landscape shifting under their feet, so they hired a new chief financial officer three months ago. Her name is Robynne Sisco, and she’s held high-ranking positions at VMWare, Inc. (NYSE:VMW), Verisign Inc. (NASDAQ:VRSN), and Oracle Corporation (NYSE:ORCL).

In an interview with Fortune magazine, Sisco signalled a shift toward profit-seeking. (Source: “What Workday’s New CFO Says About the Quest for Profitability,” Fortune, August 24, 2016.)

“Profitability has been a core value of ours since Day One,” she said. “But we have not had it as a focus area because we’ve been really focused on the growth story. Now that we’re over $1 billion in revenue, it’s really time for us to start focusing on profitability.”

Sisco’s comments help to pacify WDAY stock investor concerns that their money was simply going into a dark well, never to return. She explained that, although the company breaks even on its core business, it spends a lot on research and development.

“If you look at our R&D compared to a more mature cloud company like a Salesforce CRM 2.65%, you’ll see that it’s significantly higher because we’re trying to invest in the product,” she said. “But you do reach a point, where we’re at now, where you realize it’s time for us to turn the corner. We can’t keep reinvesting every incremental dollar.”