Shares of Workday (WDAY) are sliding after Wedbush analyst Steve Koenig joined his Brean Capital peer and downgraded the stock to Underperform, a rating equivalent to "sell," as he expects a deceleration in the company's fundamentals. Conversely, Citi analyst Walter Pritchard remains a buyer of Workday, forecasting stock outperformance driven by the company's fundamentals and low expectations.
DECELERATION SEEN: Wedbush's Koenig downgraded Workday to Underperform from Neutral based on a likely deceleration in fundamentals and valuation. The analyst said that his first quarter checks suggest softer implementation pipelines due to macro and competitive factors, and Oracle's (ORCL) aggressive discounting. While Koenig expects a first quarter beat, he sees a risk of a muted guidance raise due to light new contracting activity in the quarter. The analyst believes investor expectations appear too high and views risk and reward as skewed to the downside over the next 12 months. He has a $63 price target on Workday's shares.
ACCOUNTING CHANGE COMING: On May 9, Brean Capital analyst Yun Kim downgraded Workday to Sell from Hold with a $55 price target, to reflect a potentially slower ramp of its Financial application business, which he sees as the "single most important" driver of the stock this year. The analyst said that his channel checks indicate that a portion of Workday's target customers are expected to undergo a "major accounting change" scheduled to be implemented by 2018, which will make it difficult for them to migrate to a new financial system. Many companies affected by the implementation of new accounting changes are unlikely to adopt a new financial system, including Workday's, which could introduce additional risks and complexities on top of what the company is already facing, Kim told investors. The analyst believes headwinds to Workday's Financial application business starting this year are not fully appreciated by investors.
CITI PREDICTS OUTPERFORMANCE: Citi's Pritchard remains bullish on Workday, raising his price target for the stock to $89 from $76 earlier this week. The company's set-up looks "good" into its first quarter results, the analyst told investors on Wednesday, adding that he expects continued strength in the core business with building momentum in Financial/modules. While Pritchard acknowledged that Workday is one of the "most controversial" companies in hyper-growth, he continues to believe that the combination of improving fundamentals against low expectations and ramping profitability should alleviate these concerns and drive outperformance. Citi has a Buy rating on the shares.
PRICE ACTION: In afternoon trading, shares of Workday had slipped more than 3% to $75.35.
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