Name That Trade – WDAY: Earnings Preview

by Dan May 26, 2015 1:19 pm • Commentary

Event: Workday (WDAY) reports Q1 results tonight after the close.  The options market is implying about a 7% which is rich to the 4 qtr avg move of about 4.4%.  

Sentiment:  Wall Street analyst are generally bullish on the stock with 19 Buy ratings, 18 Holds and only 1 Sell with an average 12 month price target of $104, about 12% higher than current levels.  Short interest sits at about 10% of the float.

Price Action / Technicals:  The stock’s 14% year to date gains come after a disappointing Q4 report back in late February when the stock was at the 2015 highs, sending the shares down 5.6% the next day, that ended with a 2 week 15% decline.  Since mid March the stock has been in a very stable uptrend, once again in striking distance of the ytd highs just north of $95:

[caption id="attachment_53935" align="aligncenter" width="600"]WDAY ytd chart from Bloomberg WDAY ytd chart from Bloomberg[/caption]

Longer term, the two year chart, which shows the blow off top from early 2014 is actually fairly constructive, with a building base of support at $80, and the stock approaching long term resistance in the high $90s:

[caption id="attachment_53941" align="aligncenter" width="600"]WDAY 2yr chart from Bloomberg WDAY 2yr chart from Bloomberg[/caption]

Volatility Snapshot: Short dated implied volatility is elevated into earnings as expected, but also as traders have been abuzz about the potential for M&A in the space, as media reports suggest that MSFT was willing to pay $55 billion for larger cloud service provider (CRM).  As I mentioned above, the steady incline of late as caused 30 day at the money realized volatility (white line – how much the stock is moving) to approach 52 week lows, while 30 day at the money realized volatility (blue line – the price of options) has reached one of the widest gaps in almost a year.  If the stock does not realize the implied move, and there is no conjecture about consolidation in the space, then options prices will get slayed in the coming weeks:

[caption id="attachment_53936" align="aligncenter" width="600"]WDAY 1yr chart of 30 day at the money IV (blue) vs 30 day realized vol (white) from Bloomberg WDAY 1yr chart of 30 day at the money IV (blue) vs 30 day realized vol (white) from Bloomberg[/caption]

MY VIEW:  the problem with WDAY is two fold, an inability to turn a profit since its inception despite sales growth that has been above 50% and should be about 45% this year to $1.1 billion.  The stock trades 15x sales and has nearly an $18 billion market cap.  This juxtaposed to CRM which is expected to have nearly $7 billion in sales this year, mildly profitable, and only trades about 7x its sales with a market cap around $48 billion.  I can’t believe I just made an argument why CRM is cheaper than WDAY, but you can see how this M&A stuff can quickly get out of hand.  I suspect there are many out there who feel that if MSFT were to buy CRM then ORCL or SAP would make a $25 billion bid for WDAY.  Seems a bit nuts, the size, but who knows in an environment like the one we are in? If you are a CEO of a major tech company I suspect you have more cover when things go wrong if you bought best of breed as opposed to a second tier player with a ridiculous valuation.

As for tonight’s print? It would take a meaningful beat and raise for the stock to breakout in my opinion.  But if they were able to put up such numbers, it is clear that there is little overhead resistance and the stock is off to the races.

On the flip-side an inline quarter with ok guidance and the stock is down 3-5%, while a miss and guide down and the stock is down 10%.

Potential Trades: For those with a directional inclination, we might consider the following trades:

Bullish:  Sell the implied move and look to finance longer dated calls in the event of a pick up in M&A chatter.

WDAY ($92.50) Buy May 29th 98/ July 97.5 call calendar for 2.00

-Sell 1 May 29th 98 call at 1.30

-Buy 1 July 97.5 call for 3.30


Bearish: Buy out of the money premium targeting a move back below 90 with the assumption that stock finds support in mid 80’s:

WDAY ($92.50) Buy the May29th weekly 90/85/80 put fly for .95

– Buy 1 May29th 90 put for 2.00

– Sell 2 May29th 85 puts at .60 (1.20 total)

– Buy 1 May29th 80 put for .15