Name That Trade – $WDAY: No Longer Working

by CC September 30, 2015 12:39 pm • Commentary

Yesterday, cloud computing vendor Workday (WDAY) held an analyst meeting, and the stock’s 5% decline today reflects investors disappointment. Let’s first get a sense for where the stock is and where it has been and then get into the nitty gritty on recent guidance and what analysts/investors took away from yesterday.

The stock is down 17% on the year, and if closed today here ($68) or lower, it would mark a new 52 week closing low.  The stock is down 31% from its 52 week highs, and down 43% from its all time highs made in Q1 2014:

WDAY since Oct 2012 IPO from Bloomberg
WDAY since Oct 2012 IPO from Bloomberg

Until August, $80 was a massive technical support level, but with the stock now approaching the August 24th intraday lows, below that level there is little support until $60.

Back in late August when WDAY released their Q2 results (they were better than expected) they guided Q3 below consensus but guided the full fiscal year above prior guidance.  If the company misses Q3 and then has to guide down Q4, which is kind of what the stock’s current price action is telling you, then management is pulling some classic transitional bull to bear market bullshit.  Obviously only time will tell, but investors appear to be speaking with their wallets already.

Sales have been growing fast for WDAY, expected to more than double from fiscal 2014 to an expected $1.16 billion in the current fiscal year 2016, despite failing to turn a profit.  The stock sports a $13 billion market cap, trading at about 11x expected sales.  While we know that cloud software providers are likely on the tops of many acquirer’s lists in enterprise computing, the premium that would be applied (prob 30%) to buy WDAY would place it in a unique category, and I am not sure would make a ton of sense for the likes of ORCL, IBM or HPQ, and clearly not for MSFT.

So there is little valuation support for WDAY, the technicals are deteriorating, the analyst community is very mixed with 19 Buy ratings, 18 Holds and 1 Sell and the investor sentiment seems to be taking a dim view towards the stocks of companies that are purely priced for sales growth.   WDAY is the sort of stock that should be sold on rallies, likely pressed on poor fundamental news and avoided for those looking to catch a falling knife. We have seen this movie before in bubbles past, and just as this stock overshot on the upside in 2014, it is likely to do so on the downside, and in the latter scenario you don’t want to be early.

This stock, and the sector is kind of on our hit list and we will look to be opportunistic on the short side.