Workday shares are getting a lift Thursday from Citigroup analyst Daniel Jester, who picked up coverage of the enterprise software company and upgraded the stock to Buy from Neutral. Jester lifts the firm’s target price to $265, from $218.
Workday (ticker: WDAY) is a leader in cloud-based software for “human capital management,” which is used to manage HR departments and benefits. The company also has made a determined push into the market for cloud-based financial software, which includes accounting and finance, revenue management, financial planning, and related processes.
Jester notes that the company has struggled to gain traction in the financial segment, which bulls had hoped would reaccelerate growth from the more mature core HR software business. But Jester contends that a combination of “recent pent-up market wins, product enhancements, the procurement opportunity and a greater desire from finance execs to evaluate the cloud” set up the segment as a driver for the business in fiscal 2022 and beyond.
The analyst writes in a research note that a survey of 120 finance IT executives found that 70% see Covid-19 as accelerating their plans to move software systems to the cloud—and he reports that 2020 and 2021 IT budgets for financial software are “holding up well compared to overall software spending.” But he also says the survey finds this is “still a 3-5 year theme as many CFOs still anticipate a large on-prem footprint in three years’ time.”
Jester adds that while financial software is the big growth opportunity for Workday, the HR side of the business is still 80% of revenue. He notes that the near-term outlook is “tough” for that segment, with the risk that the economy will slow enterprise customer growth and the potential for renewals, with lower revenue at customers with reduced employee counts. But he espies growth opportunities in midmarket company and international markets and he sees cross-selling opportunities in analytics, planning, and procurement. “Out-year consensus estimates appear conservative,” he writes.
Concludes Jester: “While the next few quarters will see lower revenue growth, emerging from the Covid-19 slowdown we see growth vectors manifesting in sustainable 20% topline growth over the medium-term with improving margins.”
Workday stock was up 2.2%, at $219.81, in recent trading. The
was up 0.5%.
Write to Eric J. Savitz at [email protected]