3 Reasons Workday Inc.'s Stock Could Rise

In the year that followed its October 2012 initial public offering, Workday stock climbed roughly 50% to trade in the $79 range. The growth was spurred by belief that the strength of its enterprise resource planning software would allow the company to achieve rapid and sustained growth. In March 2014, market optimism on the company reached a peak, and shares traded as high as $116.47. In May, its stock reached its current 52-week low of $64.21, then rebounded somewhat on a solid quarterly performance.

WDAY Chart

WDAY data by YCharts.

Today, the stock is back to trading in the $79 range. Given Workday's wild swings and the appearance of stickiness in its current price range, it's worth looking at some factors that could drive shares higher. Amid significant threats to the business, there's no certainty as to what the future holds for the company and its investors, but these three elements could be key to rejuvenating the stock.

Workday could secure new large customers in key sectors and marketsIn the company's last earnings call, CEO Aneel Bhusri pointed to the acquisition of new, large clients as a major growth driver for the company going forward. The provider of enterprise software-as-a-service solutions has found success with midsized companies, and is now focused on moving upmarket. In its last fiscal quarter, Workday secured Bank of America as a customer, its largest to date. The company also added another Fortune 500 customer to its client base, but its identity has yet to be disclosed. The reveal of this new client and other large customers down the line have the potential to brighten Workday's outlook, especially if these companies subscribe to all of the company's enterprise software suites.

Workday has also indicated that it added a number of global European businesses to its client list in the last quarter, and that these companies will be disclosed at some point in the not-too-distant future. The Oct. 8 announcement that TalkTalk Telecom Group, a British telecom company with a market cap of $4 billion, had signed on for Workday's services wasn't enough to provide a sustained increase in its stock price, but more significant foreign signings should bolster optimism that the company can deliver the aggressive growth priced into its valuation. Beating adoption expectations in the government and education segments could also be drivers for the company's stock.

New deployment partnerships could bolster Workday
The advancement of deployment partnerships with Hewlett-Packard and Consumer Sciences Corp. represented some of the most encouraging Workday news in the last six months. As the company aims to move upmarket, it will be looking for more large customers to serve as deployment partners. This strategy allows the service provider to reach the customers of its direct clients while bypassing many hurdles and costs associated with acquiring new subscribers.

Although Workday is broadly regarded as offering a high-quality product in the ERP software field, it is also relatively young, and deployment partnerships with large, established companies offer the software provider a means of combating the brand and positional advantages enjoyed by competitors SAP and Oracle.

Workday's Financial Management and Recruiting suites could beat expectations
For Workday to beat market expectations for its growth, it will need to deliver strong adoption for its finance and talent acquisition software. The company aims to get existing customers for its human resources management software suite on board with its financial and talent acquisition products, and to sign up new customers for its expanded enterprise management products. Success on these fronts would enable the company to grow revenue from subscriptions, which is one key metric investors are watching.

The company hasn't given adoption estimates for Workday Recruiting, but it has indicated uptake is strong. If this product finds better than expected buy rates, it could be a compelling indication the company is building an integrated software ecosystem with staying power, and also strengthening its brand. Similarly, the announcement of impressive performance from its Workday Financial Management software suite could translate to increased optimism about the company's stock. The focus on moving into financial software products finds the company increasingly in competition with not only Oracle and SAP, but also NetSuite. If the enterprise market warms to Workday's finance management offerings, its future prospects could begin to look much stronger.

Foolish thoughts
Workday has a trailing price-to-sales ratio of 22.8, and the company doesn't expect to achieve profitability in the foreseeable future. As such, its stock pricing is largely dependent on the business's growth level. With Workday facing strong competition from larger, more established cloud companies, and with mounting fears that the market will turn bearish on tech, there are valid reasons to view Workday's stock skeptically. Even so, delivering in the areas that are key to growth gives the company's stock the potential to rise.

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The article 3 Reasons Workday Inc.'s Stock Could Rise originally appeared on Fool.com.

Keith Noonan has no position in any stocks mentioned. The Motley Fool recommends Bank of America and NetSuite. The Motley Fool owns shares of Bank of America and Oracle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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