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Stock Analyst Update

Raising Our Fair Value on Workday

The narrow-moat firm continues to execute.

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 Workday (WDAY) reported solid second-quarter results for its fiscal 2019 and we are raising our fair value estimate to $152 per share, from $141 previously, and maintaining our narrow economic moat rating. As a reminder, in June, Workday acquired Adaptive Insights, a cloud financial planning and analysis tool, for about $1.55 billion with the acquisition closing in August. We note that Gartner identified Adaptive Insights as a leader in this space, benefiting from ease of use and integration capabilities. Workday refrained from providing supplementary financial guidance for its fiscal year at the time of the acquisition, but this quarter, we received some additional insights. The firm raised full-year guidance for its subscription segment to $2.341 billion to $2.348 billion and we track near the high end of those estimates. Current guidance includes a $42 million contribution from Adaptive Insights. Overall, while we continue to believe Workday is supported by strong switching costs, creating a narrow moat, we see shares as fairly valued at this point and we would urge investors to await a pullback before jumping into this name.

Workday hit some notable metrics this quarter, reporting that 35% of the Fortune 500 and 50% of the Fortune 50 utilize Workday for core HR. However, the firm reiterated on its conference call that it is no longer just an HCM vendor, as HCM only accounts for 25% of the firm's total addressable market due to the immense TAM for its financial management tools. For the quarter, financial management had 60% new customer growth. With Adaptive Insights, Workday's plan is to both offer the tool as a stand-alone product or an add-on in the firm's enterprise resource planning suite. We applaud the firm for its incremental investments in ERP, which have paid off. We think there is credence to the idea that enterprises are becoming more comfortable with a cloud-based financial management tool, benefiting Workday.

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William Fitzsimmons does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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