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Stock Strategist

Workday's Moat Widens

The company's ability to retain customers causes us to upgrade our rating.


Workday’s (WDAY) second-quarter results did not disappoint, as non-GAAP earnings per share beat Capital IQ consensus by 27% and subscription revenue surpassed the high end of management’s guidance. The strong quarter reflects our thesis that Workday is relatively resilient amid the COVID-19 pandemic. While we believe the coronavirus outbreak has decelerated the company’s top line to some extent, we agree with Workday that employee engagement for enterprises is even more important amid the pandemic, and human capital management software plays an integral part in such engagement.

Independent of (but supported by) the great quarter, we’ve upgraded our economic moat rating for Workday to wide from narrow, as the company’s consistently high gross retention rates and ability to achieve returns on invested capital confirm our belief that Workday’s software is incredibly sticky, even without adoption of its latest offerings. The strong quarter and our wide moat upgrade have us more confident in Workday’s long-term potential, leading us to raise our fair value estimate to $198 per share from $183.

Julie Bhusal Sharma does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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