Workday's (WDAY) somewhat-cautious remarks about future revenue growth are driving widespread selling in the shares of fast-growing enterprise software firms.
In some ways, such selling looks like an overreaction, given that Workday's outlook wasn't truly awful and that the growth slowdown it's forecasting appears to partly stem from company-specific issues. But at the same time, it's hard to ignore the fact that the valuations that many high-growth software names effectively guarantee a harsh reaction to any bad news involving the industry.
At Workday's analyst day, CFO Robynne Sisco said that her company expects its cloud human capital management (HCM) software business, which still produces the lion's share of its revenue, to exit fiscal 2020 (ends in Jan. 2020) growing around 20%. She added that Workday's cloud financials software business -- said to account for nearly 20% of its revenue growth -- will exit fiscal 2020 growing around 50%.
This outlook by itself isn't that bad, given that the consensus revenue growth estimate for Workday's January quarter was only at 21.5% going into its analyst day. However, Sisco also indicated that going forward, HCM won't be contributing as much to revenue growth as it has in the past. She did say that Workday expects its strong financials to continue, but added that its "new innovations," which include solutions such as the Workday Cloud Platform for developing finance and HCM apps and the People Analytics platform for analyzing workforces, won't be meaningful revenue contributors until fiscal 2022 or later.
Separately, during a Q&A session, CEO Aneel Bhusri and co-President Chano Fernandez admitted that macro uncertainty has led to some delays for deal closings, albeit while adding that Workday isn't seeing a major business impact yet.
As of the time of this article, Workday's stock is down 12.1% to $159.13. The tumble has wiped out Workday's 2019 gains, and leaves shares about 30% below a July high of $226.83.
Quite a few other high-growth, high-multiple, enterprise software firms are also seeing large declines. Okta (OKTA) , Anaplan (PLAN) , Alteryx (AYX) , Coupa Software (COUP) and MongoDB (MDB) are each down between 6% and 10%, as are a slew of other names.
It's worth keeping in mind here that the HCM growth slowdown Workday is forecasting appears to have a lot to do with the high penetration rates it now has among large U.S. enterprises. Workday, which still gets 76% of its revenue from North America, noted at its analyst day that its HCM software is now used by more than 40% of the Fortune 500, and roughly 50% of the Fortune 100.
And while the company still has a lot of headroom to both grow its international sales and cross-sell offerings to existing HCM clients, it's also frequently battling with the likes of Oracle (ORCL) , SAP (SAP) , Ceridian (CDAY) and Ultimate Software for new deals.
On the other hand, Workday's comments about macro uncertainty leading to some delayed deal closings are the kind of thing that could have some relevance for many peers. Much like the light guidance that Autodesk (ADSK) issued in August, the remarks are a reminder that while the subscription-based business models of cloud/SaaS software firms could help them weather a downturn better than if they were dependent on traditional software license deals, they're not fully immune to macro pressures.
And more broadly speaking, any reminder that investors can't take the high growth rates that software high-flyers have been posting for granted is bound to unsettle Wall Street, given that these companies sport valuations that price in quite a lot of long-term growth.
Workday, for its part, went into its analyst day sporting an enterprise value (market cap minus net cash) equal to more than 10 times its expected billings for fiscal 2020, and more than 8 times its expected fiscal 2021 billings. Analysts on average were forecasting the company would record 21% billings growth in fiscal 2021 and 19% growth in fiscal 2022 -- and given the tendency of the sell-side to be cautious with its estimates for SaaS firms, informal investor expectations may have been higher still.
Not surprisingly, the other software names registering sharp declines today also generally carry high multiples -- often markedly higher than Workday's. Even after today's declines, Okta trades for 18 times its fiscal 2021 (ends in Jan. 2021) billings; Alteryx trades for 14 times its expected 2020 billings; and MongoDB trades for 16 times its expected 2020 billings.As I've mentioned before, valuations such as these require at a minimum that those investing in these firms have a very high degree of confidence that a company will live up to the high growth expectations markets have for them, and won't hit any major rough patches. Unlike many chip companies, and perhaps now some high-growth consumer Internet names, there just isn't much of a margin of error here.