Friday, BofA Securities adjusted its outlook on Workday (NASDAQ:WDAY), a provider of enterprise cloud applications for finance and human resources. The firm reduced the price target to $275 from $310 while maintaining a Buy rating on the stock.
The analyst at BofA Securities cited Workday's current 4% share of the $188 billion ERP market and its potential to continue gaining share as an emerging cloud leader. The firm anticipates that Workday's Human Capital Management (HCM) growth could align with the higher end of the industry's 12-15% growth rate. This expectation is based on the steady cross-selling of modules, which have less than 10% penetration into Workday's existing customer base of over 5,000.
The report noted that the stock is currently trading at a reasonable 24 times calendar year 2025 estimated free cash flow (FCF), using the after-hours price of $232. This valuation is adjusted to 1.1 times for the 22% growth rate, which is slightly above the growth-adjusted price-to-earnings ratio of peer companies at 1.0 times for 23% growth.
BofA Securities believes that Workday's sustainable low 20s free cash flow growth, driven by a balance of growth and margin improvements, should provide support at the current valuation. The firm has fine-tuned its estimates and lowered its price objective to $275, which now represents 30 times calendar year 2025 estimated FCF, adjusted for growth from 32 times previously. This adjustment accounts for the near-term deceleration in calculated remaining performance obligations (cRPO).
The new price target suggests a 19% upside from the after-hours trading price of $232. BofA Securities reiterated its Buy rating, indicating a continued positive outlook for Workday despite the revised price target.
InvestingPro Insights
With Workday (NASDAQ:WDAY) continuing to make strides in the enterprise cloud applications market, insights from InvestingPro provide a deeper look into the company's financial metrics and valuation. Workday holds a significant cash position, with cash exceeding debt, which can be reassuring for investors considering the company's financial stability. Additionally, Workday's prominence as a player in the Software industry is reflected in its substantial market capitalization of $60.73 billion.
Despite a high P/E ratio of 46.91, which indicates a premium valuation relative to current earnings, the company's PEG ratio of 0.11 suggests that its price may be more reasonable when factoring in near-term earnings growth. Moreover, Workday's revenue has grown by 16.78% over the last twelve months as of Q1 2023, highlighting the company's ability to increase sales in a competitive market. The firm's gross profit margin stands at a robust 75.6%, demonstrating efficiency in its operations.
For those seeking further analysis, InvestingPro offers additional InvestingPro Tips for Workday, including insights into valuation multiples, stock volatility, and liquidity. Investors can explore these tips and more by visiting https://www.investing.com/pro/WDAY, and can benefit from an additional 10% off a yearly or biyearly Pro and Pro+ subscription with the coupon code PRONEWS24. Currently, there are 12 more InvestingPro Tips available, providing a comprehensive understanding of Workday's financial health and market position.
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