Workday vs. Ceridian: Which HCM Software Stock is a Better Buy?

Human capital management (HCM) software helps employers manage and look after their employees. Even though cloud security remains a restraint for HCM software adoption, increasing demand from almost every industry as part of their digital transformation efforts and cost reduction should boost the HCM software market's growth. Moreover, as hybrid working is expected to continue in the foreseeable future, the demand for HCM software is expected to remain steady. Furthermore, the future looks promising for the HCM software industry due to the consistent advancements in the Artificial Intelligence (AI) and Machine Learning (ML) space. According to a Mordor Intelligence report, the human capital management software market is expected to grow at a CAGR of 6.7% by 2026. Therefore, both Workday (WDAY) and Ceridian HCM Holding (CDAY) should benefit.

WDAY provides enterprise cloud applications that help its customers to manage critical business functions and optimize their financial and human resources. The company offers a suite of financial management applications, which enable chief financial officers to maintain accounting information in the general ledger. CDAY operates as a human capital management software company internationally. The company offers Dayforce and Powerpay. It also provides Bureau solutions for payroll and payroll-related services and sells its solutions through direct sales force and third-party channels.

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On November 18, 2021, WDAY entered into a definitive agreement to acquire VNDLY, an industry leader in cloud-based external workforce and vendor management technology. The combination will provide customers with a unified workforce optimization solution for managing all types of workers, increasing the demand for its solution.

On February 23, 2022, CDAY announced Dayforce Wallet Rewards, a new cash back rewards program for Dayforce Wallet, a market-leading pay solution that enables employees to access their earned wages at any time. Seth Ross, General Manager, Dayforce Wallet, and Consumer Services, CDAY, said, “Dayforce Wallet Rewards reinforces our commitment to continue delivering value to users by putting cashback on their Dayforce Cards.”

Recent Financial Results

WDAY’s total revenue increased 20% year-over-year to $1.33 billion for the fiscal third quarter ended October 31, 2021. The company’s non-GAAP operating income grew 23.9% year-over-year to $332.25 million, while its non-GAAP net income came in at $286.58 million representing a 30.4% year-over-year increase. Also, its non-GAAP EPS came in at $1.10, up 27.9% year-over-year.

CDAY’s revenues increased 26.6% year-over-year to $282.10 million for the fiscal fourth quarter ended December 31, 2021. The company’s adjusted EBITDA grew 16.9% year-over-year to $38.70 million. However, its adjusted net income came in at $9.30 million, representing a 33.6% year-over-year decrease. Also, its adjusted EPS came in at $0.06, down 33.3% year-over-year.

Past and Expected Financial Performance

WDAY’s revenue and total assets grew at CAGRs of 23.2% and 23.6%, respectively, over the past three years. Analysts expect WDAY’s revenue to increase 18.7% in fiscal 2022 and 19.4% in fiscal 2023. The company’s EPS is expected to grow 33.4% in fiscal 2022 and decline 8.7% in fiscal 2023. Moreover, its EPS is expected to grow at 15.8% per annum over the next five years.

On the other hand, CDAY’s revenue and total assets grew at CAGRs of 11.4% and 10.9%, respectively, over the past three years. The company’s revenue is expected to increase 17.7% in fiscal 2022 and 16.6% in fiscal 2023. Its EPS is expected to grow 48.5% in fiscal 2022 and 46.9% in fiscal 2023. Also, CDAY’s EPS is expected to grow at 12% per annum over the next five years.

Profitability

WDAY’s trailing-12-month revenue is 4.88 times what CDAY generates. WDAY is also more profitable with a gross profit margin and levered FCF margin of 73.08% and 35.32% compared to CDAY’s 42.57% and 13.82%, respectively

Furthermore, WDAY’s ROE, ROA, and ROTC are 0.85%, 0.50%, and 0.74% compared with CDAY’s negative returns.

Valuation

In terms of forward non-GAAP P/E, CDAY is currently trading at 183.73x, 229.2% higher than WDAY’s 55.81x. Moreover, CDAY’s forward non-GAAP PEG ratio of 14.13x is 557.2% higher than WDAY’s 2.15x.

So, WDAY is relatively affordable here.

POWR Ratings

WDAY has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. On the other hand, CDAY has an overall rating of D, which translates to a Sell. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

WDAY has an A grade for Growth, consistent with analysts’ expectations that its EPS and revenue will increase in the near term. On the other hand, CDAY has a B grade for Growth.

Moreover, WDAY has a grade of B for Quality. This is justified given WDAY's 4.90% trailing-12-month CAPEX/Sales, 116.2% higher than the industry average of 2.26%. On the other hand, CDAY has a Quality grade of F, in sync with its 1.12% trailing-12-month CAPEX/Sales, 50.4% lower than the industry average of 2.26%.

Of the 164 stocks in the Software - Application industry, WDAY is ranked #29. In comparison, CDAY is ranked #131.

Beyond what I’ve stated above, we have also rated the stocks for Momentum, Value, Stability, and Sentiment. Click here to view all the WDAY ratings. Also, get all the CDAY ratings here.

The Winner

Rapid digital transformation and increasing demand for cloud HR processes should drive the HCM software market’s growth. While both WDAY and CDAY are expected to gain, it is better to bet on WDAY now because of its lower valuation and higher profit margin.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Software - Application industry here.

WDAY shares were unchanged in after-hours trading Thursday. Year-to-date, WDAY has declined -18.60%, versus a -9.82% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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