Workday, Inc. (NASDAQ:WDAY) Investors Are Less Pessimistic Than Expected

Workday, Inc.'s (NASDAQ:WDAY) price-to-sales (or "P/S") ratio of 9.3x might make it look like a strong sell right now compared to the Software industry in the United States, where around half of the companies have P/S ratios below 4.3x and even P/S below 1.6x are quite common. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Workday

How Has Workday Performed Recently?

There hasn't been much to differentiate Workday's and the industry's revenue growth lately. It might be that many expect the mediocre revenue performance to strengthen positively, which has kept the P/S ratio from falling. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on analyst estimates for the company? Then our free report on Workday will help you uncover what's on the horizon.

What Are Revenue Growth Metrics Telling Us About The High P/S?

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.

If we review the last year of revenue growth, the company posted a terrific increase of 17%. The strong recent performance means it was also able to grow revenue by 68% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 17% per annum during the coming three years according to the analysts following the company. With the industry predicted to deliver 15% growth each year, the company is positioned for a comparable revenue result.

In light of this, it's curious that Workday's P/S sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

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

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Given Workday's future revenue forecasts are in line with the wider industry, the fact that it trades at an elevated P/S is somewhat surprising. 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. Unless the company can jump ahead of the rest of the industry in the short-term, it'll be a challenge to maintain the share price at current levels.

You should always think about risks. Case in point, we've spotted 1 warning sign for Workday you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.