Workday Inc (WDAY, Financial) recently reported a daily gain of 0.3% and a three-month gain of 18.68%. Despite a Loss Per Share of 1.03, the question arises: is the stock modestly undervalued? This article aims to provide a comprehensive valuation analysis of Workday (WDAY), encouraging readers to delve into the financial intricacies of the company.
Company Introduction
Workday is a software company that offers human capital management, financial management, and business planning solutions. Known for being a cloud-only software provider, Workday is headquartered in Pleasanton, California. Founded in 2005, Workday now employs over 12,000 employees. With a market cap of $60.30 billion and sales of $6.50 billion, the company's stock price stands at $230.9, while its GF Value, an estimation of fair value, is $309.65. This comparison between the stock price and the GF Value paves the way for a deeper exploration of the company's value.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
We believe the GF Value Line is the fair value that the stock should be traded at. The stock price will most likely fluctuate around the GF Value Line. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
Workday stock shows every sign of being modestly undervalued based on GuruFocus' valuation method. GF Value estimates the stock's fair value based on three key factors: historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. If the share price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. On the other hand, if the share price is significantly below the GF Value calculation, the stock may be undervalued and have higher future returns. At its current price of $ 230.9 per share, Workday stock shows every sign of being modestly undervalued.
Because Workday is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth.
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Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Therefore, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Workday has a cash-to-debt ratio of 1.94, which ranks worse than 55.39% of 2690 companies in the Software industry. Based on this, GuruFocus ranks Workday's financial strength as 5 out of 10, suggesting fair balance sheet.
Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, is less risky. A company with high profit margins is usually a safer investment than those with low profit margins. Workday has been profitable 1 over the past 10 years. Over the past twelve months, the company had a revenue of $6.50 billion and Loss Per Share of $1.03. Its operating margin is -2.62%, which ranks worse than 60.12% of 2723 companies in the Software industry. Overall, the profitability of Workday is ranked 4 out of 10, which indicates poor profitability.
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Workday's 3-year average revenue growth rate is better than 65.75% of 2391 companies in the Software industry. Workday's 3-year average EBITDA growth rate is 0%, which ranks worse than 0% of 1992 companies in the Software industry.
ROIC vs WACC
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Workday's return on invested capital is -2.97, and its cost of capital is 11.52.
Conclusion
In conclusion, the stock of Workday (WDAY, Financial) shows every sign of being modestly undervalued. The company's financial condition is fair and its profitability is poor. Its growth ranks worse than 0% of 1992 companies in the Software industry. To learn more about Workday stock, you can check out its 30-Year Financials here.
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