$WDAY FQ1 Earnings Preview with Options

by Dan May 31, 2016 12:49 pm • Commentary• Trade Ideas

Event: Workday Inc. (WDAY) report their fiscal Q1 results tonight after the close. The options market is implying about a 9.5% one day post earnings move, which is about inline with the 4 qtr one day average post earnings move of 9%, but rich to its 6.3% average in the 14 quarters since its IPO in 2012.

Sentiment: Wall Street analysts are mixed on the stock, with 18 Buy ratings, 16 Holds and 3 Sells with an average 12 month price target of $76.28, right about where the stock is trading now.  Short interest sits at about 15% of the float.

Price Action / Technicals: WDAY has traded in a massive range over the last 12 months, with a 45% peak to trough decline from its 52 week highs made in November, to its 52 week lows made February. The stock has since recovered a good bit of the losses, having climbed 60% since early Feb, but remains 10% below its 52 week lows, and down 4% on the year.

From a technical perspective, WDAY has been in a downtrend since late 2014, making a series of lower highs and lower lows, and once again now testing the downtrend:

[caption id="attachment_64006" align="aligncenter" width="600"]WDAY since 2012 IPO from Bloomberg WDAY since 2012 IPO from Bloomberg[/caption]

My View on the Stock: The stock is a total joke. Although they’re expected to have $1.5 billion in sales in fiscal 2016 the cloud based human resource application provider to businesses is also expected to see continued sales growth deceleration in 2016 to 33%. That’s down from 38% in 2015 and 68% in 2014. They also expect GAAP eps losses to increase from 1.53 in 2015 to 1.79 in 2016.  And on an adjusted basis, WDAY posted a one cent loss for 2015 and is expected to post a one cent gain in 2016. That’s the funny part. The stock trades 10x expected sales, and nearly 100x ev/ebitda.

But could WDAY be a take-over candidate from the likes of an Oracle Corp (ORCL) looking to expand its software as a services (SaaS) offering in an effort to better compete with their arch enemy SalesForce.com (CRM)? In their latest quarter that segment grew 57% year over year. It’s possible. But it would be an expensive acquisition as it would likely have to come at a considerable premium to their existing $15 billion market cap. And as pointed out by InformationWeek, on the company’s conference call following ORCL’s fiscal Q3 results in mid March, co-CEO Mark Hurd had some Trumpian boasts about the company’s competitive positioning:

Answering an analyst’s question about competitive wins against Workday, Hurd ticked off a list of about 10 of them, including Southwestern Energy and Fannie Mae.

“We are seeing a lot of Workday defections,” Hurd said. “It’s slaughter.”

My View into the Print:  The stock is priced to perfection in an environment where enterprise spending has been spotty at best.  A miss and guide down and it’s lights out.

Since their Q4 report on February 29th, the stock has risen 27%, much of it coming in its 18.5% one day gain following mixed results that included a downgrade to sales guidance. But the shares gapped higher because that guidance was pitted against very low expectations after such a sharp ytd drop in the stock and poor sentiment.

While the stock is squeezy, I wouldn’t buy it with your money given extreme valuation, which makes takeout unlikely, especially when you consider what appears to be stepped up competition from ORCL who appear to be well prepared to compete on price vs the likes of money losing companies like WDAY.

Options are not exactly liquid in the stock, with just 70,000 options of total open interest and bid/ask spreads kind of wide.


If I were long, I would consider short dated collars to protect against a sharp drop:

Vs 100 shares long at $76, you can sell 1 June 17th 85 call at $1 and using the proceeds to buy 1 of the June 70/60 put spreads for $1.40, resulting in a net debit of 40 cents. This trade structure offers profits of the stock up to $85 (less the 40 cents premium), losses from $76 to $70, but protection between $70, a massive near term support level, down to $60 (less the 40 cents premium).


Stock Alternative:

If I were long and had considerable gains since the lows prior to the last earnings report, I might consider a stock alternative/replacement:

In Lieu of 100 shares of stock at $76, you can buy a bullish risk reversal, selling 100 of the June 67.50 puts at $1.15 and use the proceeds to buy 1 of the June 80/90 Call spreads for $2.  This trade structure keeps upside exposure where one can make up to 9.15 if the stock is above 80.85 on June expiration with a max profit of 9.15 above $90. On the downside you are put the stock at an effective price of 68.35, but that is substantially lower that where the stock is currently trading and is outside (lower) that the move being implied by the options. This structure is for those that are already long or who would wish to be long (again) lower but still want upside exposure in case of a gap higher.