Workday -- Showing Better Business Fundamentals Ahead of Earnings

NEW YORK (The Street) -- After better-than-expected results from cloud giant Salesforce.com (CRM), there's no question that competition for fast-growing markets like the cloud and Big Data has grown more fierce. Workday (WDAY), which has quickly asserted itself as a software-as-a-service (SAAS) specialist, isn't likely to be left behind.

Workday stock closed Friday at $92.18, up 0.39%. The shares are up 13% year to date, besting the broader averages. The average price target of $102 implies that, on average, analysts expect the stock to gain 10.6%, so there could still be money to make on the stock.

Sure, Salesforce continues to raise the bar. Its results were impressive, affirming why it has been the subject of acquisition rumors. But for all the same reasons Salesforce is coveted, Workday, headquartered Pleasanton, CA., has qualities that are also compelling.

Ahead of the company's first-quarter earnings results Tuesday, Workday stock looks like a solid bet to go higher once the results are known.

For starters, Workday is still moving towards high-margin businesses like human capital management solutions. Stronger-than-expected demand in these areas helped the company deliver earnings and revenue that grew of 37% and 71%, respectively, in the last fiscal year. And with year-over-year revenue growth averaging almost 70% in the past four quarters, Workday has shown no meaningful sign of slowing down.

Moreover, the company continues to enjoy strong pent-up demand for its services as evidenced by its high billings growth, which is projected to climb almost 60%. While revenue growth explains how well the company has sold products and services, the billings metric denotes the strength of future revenue, or commitments to buy that have yet to hit the books.

In this case, 60% billings growth implies strong numbers for Workday in the months and quarters ahead. This means Workday's results Tuesday can offer a glimpse of what's to come the for the rest of the year. Plus, it's also encouraging that the company hasn't been shy about disclosing the number of deals it has secured from "large customers" over the past couple of quarters.

This suggests that Workday is rapidly growing market share in areas like SAAS and enterprise resource planning -- two of its main profit drivers. And these are areas where Salesforce.com has been dominant. So at some point, these customers may bear fruit for Workday. 

For the quarter that ended April, the company is expected to post a narrower loss of 8 cents a share, down from a 13-cent loss, while revenue is expected to rise 53% to $245 million.

For the full year ending in January, the loss is expected to narrow to 21 cents from 33 cents  a share. Full-year revenue, meanwhile, is expected to climb 45% year over year to $1.14 billion.

The rate at which Workday is moving towards profitability is encouraging. With both the quarterly and full-year losses coming down, management's higher margin initiative along with efficiency improvement have begun to work. This means Workday, which is projected to break even in the next fiscal year, may be ahead of schedule and the stock is coiling up to shoot higher.

his article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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