As it beats expectations and raises guidance, Workday (NASDAQ:WDAY) stock still looks like a solid opportunity.
Except for one thing: possible changes in the market conditions that have been favorable to growth stocks.
On one hand, factors like changes in the U.S Federal Reserve monetary policy, or an economic slowdown, could cause a stock market correction.
On the other hand, it’s not set in stone that the party will soon be over for tech growth stocks. Historically high valuations could hold, which would help Workday avoid giving up a large amount of its pandemic-era gains. Or perhaps, even move higher.
With this, I am neutral at today’s prices. (See WDAY stock charts on TipRanks)
Strong Fundamentals
Workday shares have seen a strong boost in price since the start of the COVID-19 outbreak. Make no mistake though, this shouldn’t be considered a “one and done” pandemic play.
More pandemic-specific plays in the software space, like Zoom Video Communications (NASDAQ:ZM), may be seeing growth significantly slow down, but that's not happening here with WDAY stock. Instead, its underlying business should continue to scale up at an above-average clip in the years ahead.
Demand for its platform, which businesses use for back-office needs like finance and HR, remains strong. Not only that, the company has its eye towards moving beyond its current niche, and becoming a more general enterprise application provider.
With its move to buy CPQ (configure price quote) software platform Zimit, it’s taking a big step toward achieving that goal.
Nevertheless, the jury’s out on whether these strengths are enough to keep it steady, or even move it higher, in the short term.
Potential Pullback
Correction fears remain high. Not just for certain changes, like the Federal Reserve tapering its bond purchase program by year’s end. Slowing economic growth may also be what causes a sell-off.
Still, it's hard to tell how changes will affect high-growth tech names like WDAY stock. While the bond purchase program (which has helped to give stocks a jolt during the pandemic) is coming to an end, interest rate increases are (for now) at least a year away.
If rates remain low, premium forward multiples could hold up. This points to Workday, even with its high forward price-to-earnings, or P/E, multiple of 71.2x continuing to move higher, in line with earnings growth.
Even if valuations compress in tandem with the likely gradual nature of what the Fed refers to as “interest rate lift-off” (the raising of rates back to prior levels), given Workday's growth, it could end up growing into its valuation.
In other words, shares may hold steady through the changes in market conditions. Despite prior hesitation on valuation grounds with similar names, like Snowflake (SNOW), there may be minimal risk that SaaS stocks are set to see a big drop in price.
Wall Street's Take
According to TipRanks, WDAY stock has a consensus rating of Strong Buy. Out of 22 analyst ratings, there are 20 Buys, and two Holds.
The average WDAY price target is $308.81 per share, implying 22.4% upside from today’s prices. Price targets range from a low of $260 per share, to a high of $340 per share.
Bottom Line
For now, how the market reacts to upcoming economic and monetary policy changes will determine where Workday shares head next.
Disclosure: At the time of publication, Thomas Niel did not have a position in any of the securities mentioned in this article.
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