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Possible Market Changes Affect Potential Upside By TipRanks


© Reuters. Workday Stock: Possible Market Changes Affect Potential Upside

As it beats expectations and raises guidance, Workday (NASDAQ:) stock still looks like a solid opportunity.

One thing is certain: market conditions could change in favor of growth stocks.

Stock market corrections could be caused by factors such as changes in U.S Federal Reserve’s monetary policy or an economic slowdown.

On the other hand, it’s not set in stone that the party will soon be over for tech growth stocks. Workday may be able to maintain its historically high valuations which would allow it not to lose a significant amount of the gains made during the Pandemic. Or perhaps, even move higher.

With this, I am neutral at today’s prices. (See WDAY stock charts on TipRanks)

Strong Fundamentals

Workday shares have seen a strong boost in price since the start of the COVID-19 outbreak. Make no mistake though, this shouldn’t be considered a “one and done” pandemic play.

More pandemic-specific plays in the software space, like Zoom Video Communications (NASDAQ:), may be seeing growth significantly slow down, but that’s not happening here with WDAY stock. In the future, however, it’s expected that its core business will grow at a higher rate than normal over the next few years.

Its platform serves back office needs such as finance and HR. The company is also looking to expand beyond the current market and become a general enterprise software provider.

With its move to buy CPQ (configure price quote) software platform Zimit, it’s taking a big step toward achieving that goal.

Nevertheless, the jury’s out on whether these strengths are enough to keep it steady, or even move it higher, in the short term.

Potential Pullback

Correction fears remain high. Not just for certain changes, like the Federal Reserve tapering its bond purchase program by year’s end. The sell-off may be caused by slowing economic growth.

It’s difficult to predict how these changes will impact high-growth tech stocks like WDAY stock. Although the bond purchasing program which gave stocks a boost in the wake of the pandemic is over, it’s likely that interest rates will rise for at least another year.

Premium forward multiples may hold up if rates stay low. This shows that Workday will see its forward price-to earnings (or P/E) multiple of 71.2x continue to climb in tandem with earnings growth.

Even if valuations compress in tandem with the likely gradual nature of what the Fed refers to as “interest rate lift-off” (the raising of rates back to prior levels), given Workday’s growth, it could end up growing into its valuation.

The changes in market conditions could mean that shares will remain steady. There may not be a large drop in SaaS stocks despite previous hesitations on valuation grounds for similar names like Snowflake, (SNOW).

Wall Street’s Take

According to TipRanks, WDAY stock has a consensus rating of Strong Buy. There are 22 Buys and 2 Holds among the 22 analysts’ ratings.

The average WDAY price target is $308.81 per share, implying 22.4% upside from today’s prices. The price targets can be as low as $260 per share or high at $340 per share.

Bottom Line

For now, how the market reacts to upcoming economic and monetary policy changes will determine where Workday shares head next.

Disclosure: Thomas Niel didn’t hold any positions in the securities discussed in this article at the time it was published.

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