Getting In Cheap On Workday, Inc. (NASDAQ:WDAY) Is Unlikely

With a price-to-sales (or "P/S") ratio of 10.4x Workday, Inc. (NASDAQ:WDAY) may be sending very bearish signals at the moment, given that almost half of all the Software companies in the United States have P/S ratios under 4.5x and even P/S lower than 1.8x are not unusual. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Workday

How Workday Has Been Performing

Recent times have been advantageous for Workday as its revenues have been rising faster than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. If not, then existing shareholders might be a little nervous about the viability of the share price.

Keen to find out how analysts think Workday's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Workday's Revenue Growth Trending?

Workday's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Taking a look back first, we see that the company grew revenue by an impressive 17% last year. The strong recent performance means it was also able to grow revenue by 68% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 18% each year as estimated by the analysts watching the company. With the industry predicted to deliver 17% growth per year, the company is positioned for a comparable revenue result.

With this in consideration, we find it intriguing that Workday's P/S is higher than its industry peers. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.

What We Can Learn From Workday's P/S?

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Analysts are forecasting Workday's revenues to only grow on par with the rest of the industry, which has lead to the high P/S ratio being unexpected. Right now we are uncomfortable with the relatively high share price as the predicted future revenues aren't likely to support such positive sentiment for long. A positive change is needed in order to justify the current price-to-sales ratio.

Before you take the next step, you should know about the 2 warning signs for Workday that we have uncovered.

If these risks are making you reconsider your opinion on Workday, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.