Analyst Note| Julie Bhusal Sharma |
Wide-moat Workday posted strong third-quarter results, as revenue and adjusted EPS exceeded our expectations and CapIQ consensus estimates. The strong quarter further underlines our continued thesis on the resiliency of Workday’s business model despite the economic headwinds brought on by the COVID-19 pandemic. With more enterprise clients embarking on digital transformations, Workday’s HCM software continues to play an integral part in this digital landscape. Management expects these digital transformation efforts to continue gathering steam as the firm revised its top line guidance for fiscal 2021 upward. Nonetheless, management implied that subscription growth in fiscal 2022 could decelerate from fiscal 2021 as a result of recognition timing, showing delayed effects of the pandemic. These implied uncertainties for subscription revenue in fiscal 2022 offset the implications of Workday’s earnings beat. Consequently, we are maintaining our fair value estimate of $198 per share. With shares trading at a premium to our estimate even after the stock fell 3% upon the news, we continue to view the company's shares as overvalued.