HomeBusinessIn a few years, you'll wish you had bought this undervalued stock

In a few years, you’ll wish you had bought this undervalued stock

Undervalued stocks are rare gems in today’s stock market. They can be difficult to find, but they can be lucrative for investors looking for the right positions. Business day (NASDAQ: WDAY) is one of the most impressive companies on the market today, and the stock’s valuation should make more investors think about buying shares.

Workday is a powerhouse in its industry

Workday has a market share of more than 20% in the Human Capital Management (HCM) industry. This places the cloud software sector alongside giants such as ADP (NASDAQ:ADP) And Oracle (NYSE:ORCL). Gartner has named the company a leader in cloud enterprise resource planning software for eight years in a row. The company’s cloud-based HCM software is among the most respected and popular available, with more than 10,000 customers, including 60% of the Fortune 500.

Colleagues look at a large data analysis dashboard.

Image source: Getty Images.

Workday has data to support these leadership claims. The company reports gross sales retention of approximately 95%. This means it lost just 5% of the customer revenue it had on its books a year ago. This is also before taking into account any expansions or upsells on existing customer accounts, which would offset at least some of the 5% lost. A gross dollar retention of 95% is a bullish benchmark for software-as-a-service (SaaS) companies.

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Workday also achieved a return on invested capital (ROIC) of 13%. ROIC is an efficiency ratio that measures a company’s profits relative to its financial resources. A high ROIC indicates efficient operations, and Workday’s performance is impressive given its focus on growth rather than profit maximization.

The company could likely improve its profit margins by cutting back on hiring and technology investments needed to fuel future growth, which would push its ROIC even higher. However, Workday takes a balanced approach that delivers impressive expansion in addition to generating cash flow.

High retention and ROIC indicate product quality and pricing power. That’s evidence of a wide economic moat. Economic moats are sustainable competitive advantages that are attractive to investors. Workday’s high competitiveness is due to its product quality and switching costs, which make it difficult for current and future competitors to steal their customers.

The financial results were impressive

Workday achieved key financial results in addition to these efficiency measures. The company grew its revenue 18% in the most recent quarter, exceeding Wall Street expectations. The HCM leader also beat analysts’ earnings expectations, with adjusted earnings per share of $1.74. The market reacted negatively to the company’s lowered full-year revenue expectations, but investors should find some comfort in a slight increase in expected operating margin.

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Although Workday’s revenue growth is slowing, it is still growing. That adds to a history of consistent revenue increases, which has been difficult for many promising software companies to maintain amid economic turmoil. Central banks around the world have raised interest rates to combat inflation, fueling concerns about slowing growth and recession. Slowing growth rates have become quite common, and Workday continues to build on previous successes.

The company’s shift toward profitability has been even more impressive. Workday reported meaningful net profit for the first time last year and expects profits to rise from here on out. Free cash flow has easily exceeded revenue over the past five years, which is important for shareholders.

WDAY Earnings Chart (TTM).WDAY Earnings Chart (TTM).

WDAY Earnings Chart (TTM).

If the company experiences slowing growth, it is demonstrating its ability to generate profits and tons of cash at its current scale. This gives the company concrete foundations to support its valuation.

Workday is trading at a reasonable valuation

Workday’s forward price-to-earnings ratio is 31, and its price-to-cash flow ratio is below 25. Those aren’t the cheapest valuation ratios you’ll find on the market, but they’re attractive when you consider the company’s growth potential. Workday expects to grow revenue by 17% next year, and recent results indicate that profits and cash flow will significantly exceed sales.

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Workday’s growth expectations mean the stock may be subject to volatility due to changes in the outlook or capital market cycles. However, the company has the necessary ingredients for continued success, along with a reasonable valuation that positions the stock for healthy shareholder returns.

Should you invest €1,000 in Workday now?

Before purchasing shares in Workday, consider the following:

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Ryan Downie has functions in automatic data processing. The Motley Fool holds and recommends positions in Oracle and Workday. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.

In a few years, you’ll wish you had bought this undervalued stock. originally published by The Motley Fool

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