Software stocks have been stuck in a rut—but shares of
look ready to climb out.
Despite a strong start to 2023, the sector hasn’t really budged over the past two months. The
iShares Expanded Tech-Software Sector
exchange-traded fund (ticker: IGM), which counts names like
(NOW) as top holdings, has returned just 1% since Nov. 25. The stocks have been held back by concerns that customers will cut IT spending as the economy weakens and sales slow, with Microsoft’s disappointing guidance this week highlighting these worries.
Workday stock (WDAY) may be a bright spot amid the software slump. Shares of the company, which provides cloud applications for companies to manage their data, have gained 17% over the past two months, buoyed by strong earnings in November. That report showed that sales still grew quickly even in an uncertain corporate spending environment, and the strength is likely to continue into 2023.
It starts with Workday’s HCM business, short for Human Capital Management. The company provides tools for human resources for more than 4,000 customers, and that business has grown at a 15% annual clip since 2019. But Workday has also been making inroads into finance, where it offers products that help chief financial officers and their teams with business and financial analytics. That division has just 1,000 customers or so, providing an opportunity for further growth as Workday uses its existing relationships with its HR customers to sell them new services. That should help boost sales growth, which analysts see growing 17% in 2023, from $6.1 billion to $7.2 billion.
Workday is “well positioned going into 2023 and they should gain traction on financials,” says Mizuho analyst Siti Panigrahi.
That sales growth should turn into earnings growth this year—earnings per share are expected to rise 27% from $3.57 to $4.54, and strong profit growth should remain over the next three years. Analysts expect Ebitda (earnings before interest, taxes, and noncash expenses) to compound at a roughly 23% annual clip to almost $2.9 billion. Not everyone buys that growth story, though—Guggenheim analyst John DiFucci downgraded the stock to Sell from Neutral on Jan. 17, arguing that the company’s forecasts are too optimistic. Workday is likely to report earnings in March and is expected to announce a profit of $0.90 a share on sales of $1.63 billion.
The stock is likely to be more resilient than many give it credit for. MoffettNathanson analyst Jackson Ader argues that Workday will continue to take market share in human resources and financial products, “with the latter being still in an earlier stage of cloud adoption across the end market.” He has a $245 price target on the stock, up 39% from a recent $177.
Working against the stock: its valuation. It trades at 39 times 12 month forward earnings, making it one of the more expensive stocks in the
But it might not be as pricey as it looks, particularly next to competitors. For instance, it trades at an enterprise-value-to-Ebitda multiple of 23 times, cheaper than peer ServiceNow, which trades at about 31 times with similar profit growth.
Workday’s valuation is “very reasonable,” says Wells Fargo analyst Michael Turin, who has a $240 price target on the shares, suggesting 36% upside.
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Write to Jacob Sonenshine at email@example.com