The past six months have been a windfall for Workiva’s shareholders. The company’s stock price has jumped 61.6%, setting a new 52-week high of $116.82 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Workiva, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.Despite the momentum, we're swiping left on Workiva for now. Here are three reasons why there are better opportunities than WK and a stock we'd rather own.
Why Is Workiva Not Exciting?
Founded in 2010, Workiva (NYSE:WK) offers software as a service product that makes financial and compliance reporting easier, especially for publicly traded corporations.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance signals its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last three years, Workiva grew its sales at a 19.2% annual rate. Although this growth is solid on an absolute basis, it fell slightly short of our benchmark for the software sector. 
2. Operating Losses Sound the Alarms
Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.
Workiva’s expensive cost structure has contributed to an average operating margin of negative 10.3% over the last year. Unprofitable software companies require extra attention because they spend heaps of money to capture market share. As seen in its historically underwhelming revenue performance, this strategy hasn’t worked so far, and it’s unclear what would happen if Workiva reeled back its investments. Wall Street seems to be optimistic about its growth, but we have some doubts.
3. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Workiva has shown mediocre cash profitability over the last year, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 9.5%, subpar for a software business.
Final Judgment
Workiva isn’t a terrible business, but it doesn’t pass our quality test. Following the recent rally, the stock trades at 7.9× forward price-to-sales (or $116.82 per share). Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're pretty confident there are superior stocks to buy right now. Let us point you toward Chipotle, which surprisingly still has a long runway for growth.
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