Workday Inc (WDAY, Financial) has recently experienced a daily loss of -9.75%, with a 3-month loss of -3.97%. The company has also reported a Loss Per Share of $0.48. Given these factors, the question arises: is Workday significantly undervalued? This article aims to conduct a comprehensive valuation analysis of Workday. Read on to uncover the intrinsic value of Workday.
Company Introduction
Workday is a renowned software company that provides human capital management, financial management, and business planning solutions. As a cloud-only software provider, Workday has made its mark in the software industry since its inception in 2005. With its headquarters in Pleasanton, California, Workday now boasts over 12,000 employees. The company's stock, currently priced at $208.3 per share, is compared with the GF Value of $304.82, an estimate of its fair value. This comparison sets the stage for a deeper exploration of Workday's value, seamlessly integrating financial assessment with crucial company details.
Exploring 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 provides an overview of the fair value at which the stock should ideally be traded. This value is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) at which the stock has traded.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
Workday's current market cap is $54.60 billion, and with its stock price significantly below the GF Value Line, the company appears to be significantly undervalued. This undervaluation suggests that the long-term return of its stock is likely to be much higher than its business growth.
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Evaluating Financial Strength
Investing in companies with low financial strength could lead to permanent capital loss. Hence, it is essential to carefully review a company's financial strength before investing. A good initial perspective on the company's financial strength can be obtained by looking at the cash-to-debt ratio and interest coverage. Workday has a cash-to-debt ratio of 2.04, ranking worse than 53.34% of 2752 companies in the Software industry. Based on this, GuruFocus ranks Workday's financial strength as 5 out of 10, suggesting a fair balance sheet.
Profitability and Growth
Investing in profitable companies poses less risk, especially those demonstrating consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one 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 $6.70 billion and a Loss Per Share of $0.48. Its operating margin is -1.47%, ranking worse than 58.67% of 2785 companies in the Software industry. Overall, GuruFocus ranks the profitability of Workday at 4 out of 10, indicating poor profitability.
Growth is probably the most important factor 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. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Workday is 15.2%, ranking better than 65.74% of 2414 companies in the Software industry. The 3-year average EBITDA growth rate is 0%, ranking worse than 0% of 2007 companies in the Software industry.
ROIC vs WACC
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Workday's return on invested capital is -11.37, and its cost of capital is 10.7.
Conclusion
In summary, the stock of Workday (WDAY, Financial) gives every indication of being significantly undervalued. The company's financial condition is fair, and its profitability is poor. Its growth ranks worse than 0% of 2007 companies in the Software industry. To learn more about Workday stock, you can check out its 30-Year Financials here.
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