Impressive Growth Company Drops by 42%, Wall Street Suggests Regret for Missing the Discount Opportunity
Impressive Growth Company Drops by 42%, Wall Street Suggests Regret for Missing the Discount Opportunity
The tech sector is experiencing a stellar year, with the Nasdaq Composite (NASDAQINDEX: ^IXIC) climbing by 30%. Many top tech companies are thriving, such as Nvidia, which has surged by 209%.
However, not every tech stock is profiting from this trend. For instance, Workiva (WK), offering a suite of software tools to aid companies in data consolidation and reporting, is struggling. Its stock price has decreased by 4% this year and is 42% lower than its all-time high, which it reached in 2021's tech boom.
Despite this, Wall Street remains bullish on Workiva. A majority of analysts monitored by The Wall Street Journal have given it a 'buy' recommendation, with none suggesting to sell. Its revenue is steadily increasing, and its stock is currently undervalued according to analysts, making it an attractive investment opportunity.
Workiva's software gains relevance
Advancements in technology like cloud computing are enabling businesses of all sizes to operate remotely, offering global customer access and remote workforces. However, relying on numerous digital applications daily results in fragmented workflows, making it difficult to track progress, gather data, and compile reports. This is where Workiva steps in with its cloud-based platform.
Workiva's platform seamlessly integrates with popular productivity and storage tools such as Alphabet's Google Drive, Microsoft Excel, and Salesforce. It aggregates data from these applications onto a single dashboard, saving managers time and effort. Furthermore, it offers hundreds of templates to convert data into reports, and even facilitate regulatory filings to the Securities and Exchange Commission (SEC), proving particularly valuable for publicly traded companies.
Workiva is now concentrating on environmental, social, and governance (ESG) reporting, a rapidly expanding market opportunity. Many governments are enacting rules requiring organizations to report their impact on the environment and society, and Workiva's ESG tool helps track environmental metrics, workforce diversity, and other relevant stats.
The platform offers pre-built ESG frameworks, allows businesses to form strategies, collect data, compile reports, and connect teams for collaboration. As mandatory ESG reporting becomes increasingly common in upcoming years, this product could significantly contribute to the company's growth.
Q3 revenue growth accelerates, driven by eager customers
Workiva reported impressive Q3 2024 (ended Sept. 30) financial results. Revenue reached $186 million, a 17% increase compared to the previous year. This also represented an acceleration from the 15% growth witnessed in Q2, and prompted management to revise its full-year revenue forecast to a range of $733 million to $735 million, increasing it by $6 million.
The growth is attributed to Workiva's high-spending customer base. By the end of Q3, the company served 6,237 businesses, a 4.9% increase from the same period last year. The number of clients with annual contract values (ACVs) of at least $100,000, $300,000, and $500,000 also saw substantial growth outpacing overall customer growth by a significant margin, as displayed in the following chart.
This underscores Workiva's software's importance to larger organizations, which often have complex digital operations. Additionally, 68% of customers had adopted at least two of the company's products during Q3, indicating a positive response to its expansion into areas such as ESG.
These impressive results are even more noteworthy considering management's careful cost management to improve profitability. Operating expenses increased by only 10% through Q3 2024, while the company still reported losses of $46.2 million, significantly reduced from the $123.3 million deficit in the previous year.
When Workiva achieves consistent profitability, it can invest more aggressively in growth initiatives, including marketing and research and development, contributing to quicker revenue growth in the long term.
Investor sentiment remains optimistic on Workiva stock
The Wall Street Journal follows 11 analysts covering Workiva. Seven of them have given it a 'buy' recommendation, while two more advocate for 'overweight' (i.e., bullish) positions. The remaining two recommend merely holding according to The Wall Street Journal.
Their average 12-month price target is $104.3, representing a 14.3% increase from the current stock price ($91.49). However, the highest target is $120, implying a potential increase of 31.1%.
As mentioned earlier, Workiva stock is 42% lower than its all-time high, which it achieved in 2021. While it was overvalued back then, with a price-to-sales ratio (P/S) around 20, its price drop in conjunction with the company's consistent revenue growth has brought the P/S ratio down to a more reasonable 7.1.
I believe the stock might surpass even the upper limits of Street's long-term projections due to management's assessment of its financial potential at a whopping $35 billion, encompassing financial statements, ESG reports, compliance reports, and beyond. Given that Workiva's current market valuation stands at a modest $5.1 billion, the company boasts ample room for expansion over the future.
In the current financial landscape, some analysts recommend investing in Workiva, despite its stock price being 42% lower than its all-time high. According to their analysis, Workiva's stock is currently undervalued, making it an attractive investment opportunity.
Workiva's software, particularly its ESG reporting tool, is gaining significant relevance in today's business environment. With mandatory ESG reporting becoming increasingly common, this product could significantly contribute to the company's growth in the upcoming years.