Salesforce.com vs. Workday: Which SaaS Stock is a Better Buy?

Because the work-from-home trend is expected to continue even after the COVID-19 pandemic, and because many countries are witnessing second and third waves of coronavirus infections, we think Salesforce (CRM) and Workday (WDAY) should witness continued steady demand for their services over the coming months. But let’s find out which of these two stocks is a better buy now.

Salesforce.com Inc. (CRM) and Workday, Inc. (WDAY) are two of the top players in the software as a service (or SaaS) space. While CRM provides enterprise software through the cloud, with a focus on customer relationship management, WDAY provides enterprise cloud applications for finance and human resources.

The COVID-19 pandemic accelerated the need for digital transformation and led to the rise of a work-from-home culture. This trend is likely to continue even in the post-pandemic environment because of its convenience. Furthermore, with many countries now seeing second and third waves of coronavirus infections, a continuation of the work-from-home trend is almost certain, at least over the near term. Consequently, we expect CRM and WDAY to see increasing demand for their services, which help employees work from home and increase business productivity.

While CRM has returned 53% over the past year, WDAY has gained 102.4%. In terms of their past-nine months’ performance, WDAY is a clear winner with 38.9% returns versus CRM’s 13.7%. But which of these two stocks is a better pick now? Let's find out.

Click here to check out our Software Industry Report for 2021

Latest Movements

CRM announced on March 18 that more than 150 international, federal, state and local government agencies, and healthcare organizations, are now using the company’s technology for vaccine management and COVID-19 tracking. Boys & Girls Clubs of America also selected its technology to work more efficiently and better engage with kids and teens across more than 4,700 of its clubs.

The Coca-Cola Company (KO) bottlers in North America partnered with CRM in February  to digitally transform its contact center and field service operations. Through its  IT Shared Services Provider CONA Services LLC, KO is expected to deploy CRM’s Consumer Goods Cloud to help streamline operations at contact centers across its  territories and provide a 360-degree views of customers. Also in February, Ferguson plc (FERGY) selected CRM to power its digital transformation.

Meanwhile, on March 9,WDAY completed its acquisition of Peakon ApS, an employee success platform that converts feedback into actionable insights. With the acquisition, WDAY will be able to offer  organizations access to a continuous listening platform that includes real-time visibility into employee experience, sentiment, and productivity to help drive engagement and improve organizational performance.

Zumiez Inc. (ZUMZ) selected the company’s Workday Financial Management, Workday Adaptive Planning, and Workday Prism Analytics in  February. The solutions should help accelerate ZUMZ’s  digital finance transformation. Also,  WDAY launched a vaccine management solution in  January  that provides organizational leaders with the insights necessary  to help ensure the health and safety of their remote and on-site workers.

Recent Financial Results

CRM’s top line climbed nearly 20% year-over-year to $5.82 billion for the fiscal 2021 fourth quarter, ended January 31, 2021. This was driven primarily by its 20% year-over-year revenue growth in its  subscription and support segments. Its gross profit increased 19.5% year-over-year to $4.34 billion. The company’s net income was $267 million, versus  a $248 million loss in the prior-year period.  Also,  its non-GAAP EPS increased 57.6% year-over-year to $1.04.

WDAY’s total revenues for the fiscal 2021 fourth quarter, ended January 31, 2021, increased 15.9% year-over-year to $1.13 billion. Its revenues from its  subscription services segment increased 19.8% year-over-year to $1 billion. The company’s non-GAAP operating income increased nearly 81% year-over-year to $210.99 million. , WDAY’s non-GAAP EPS came in at $0.73, up 46% year-over-year.

Expected Financial Performance

Analysts expect CRM’s revenue to increase 21.5% for the current quarter, ending April 30, 2021, 21.1% in fiscal 2022 and 18.9% in fiscal 2023. The company’s EPS is expected to grow 25.7% in the current quarter and 20.7% in its fiscal 2023. Its  EPS is expected to grow at a rate of 12.9% per annum over the next five years.

In comparison, the Street expects WDAY’s revenue to increase 15.8% for the current quarter, ending April 30, 2021, 15.6% in fiscal 2022 and 18.1% in fiscal 2023. The company’s EPS is expected to grow 65.9% in the current quarter and 23.5% in its fiscal 2023.  WDAY’s EPS is expected to grow at a rate of 15.3% per annum over the next five years.

Profitability

CRM’s trailing-12-month revenue is more than four times WDAY’s $4.32 billion. CRM is also more profitable, with a gross profit margin of 74.4% versus WDAY’s 72.7%.CRM’s ROE and ROA of 10.8% and 0.5%, respectively, compare favorably with WDAY’s negative values.

Valuation

In terms of forward price/earnings, WDAY is currently trading at 91.39x, 46.4% more expensive than CRM, which is currently trading at 62.43x. WDAY is also more expensive both in terms of trailing-12-month price/sales (13.79x versus 9.07x) and trailing-12-month enterprise value/sales (13.84x versus 8.93x).

In terms of trailing-12-month price/cash flow, WDAY’s 48.13x is 18.2% higher than CRM’s 40.71x.

So, CRM is the more affordable stock here.

POWR Ratings

Both CRM and WDAY have an overall B rating, which equates to a Buy in our proprietary POWR Ratings system.

CRM has a Quality Grade of B, which is consistent with its significantly higher-than-industry profitability ratios. However, WDAY’s Quality Grade of C is in sync with its negative ROE and ROA values.

Both CRM and WDAY have a Sentiment Grade of B, in sync with analysts’ positive expectations about their earnings and revenue growth.

CRM is ranked #8 of 61 stocks in the Software – Business industry and WDAY is ranked #25 of 115 stocks in the Software – Application industry.

In addition to what we’ve stated above, our POWR Ratings system also rates both CRM and WDAY for Growth, Value, Momentum and Stability. Get the ratings for CRM here. Also, click here to see the additional POWR Ratings for WDAY.

The Winner

Both CRM and WDAY can be considered good long-term investments given their market dominance in the SaaS space. However, CRM is at an advantage here given that it is ranked #1 in customer relationship management platforms. Furthermore,  we think CRM’s lower valuation coupled with its high revenue estimates makes it a much more lucrative buy compared to WDAY.

Click here to learn about 15 other top-rated Software – Business stocks. And click here to see 28 other top-rated stocks in the Software – Application industry.

Click here to check out our Software Industry Report for 2021

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CRM shares were trading at $210.71 per share on Wednesday afternoon, down $4.29 (-2.00%). Year-to-date, CRM has declined -5.31%, versus a 5.04% rise in the benchmark S&P 500 index during the same period.



About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.

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