Workday, Inc. (NYSE:WDAY) and CDK Global, Inc. (NASDAQ:CDK) are the two most active stocks in the Application Software industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
Profitability and Returns
Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. WDAY’s ROI is -21.60% while CDK has a ROI of 17.00%. The interpretation is that CDK’s business generates a higher return on investment than WDAY’s.
If there’s one thing investors care more about than earnings, it’s cash flow. WDAY’s free cash flow (“FCF”) per share for the trailing twelve months was -0.11. Comparatively, CDK’s free cash flow per share was +0.75. On a percent-of-sales basis, WDAY’s free cash flow was -1.44% while CDK converted 4.73% of its revenues into cash flow. This means that, for a given level of sales, CDK is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. WDAY has a current ratio of 1.50 compared to 2.30 for CDK. This means that CDK can more easily cover its most immediate liabilities over the next twelve months.
WDAY trades at a forward P/E of 100.15, a P/B of 16.34, and a P/S of 12.88, compared to a forward P/E of 17.47, and a P/S of 4.10 for CDK. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. WDAY is currently priced at a 3.53% to its one-year price target of $104.47. Comparatively, CDK is -11.96% relative to its price target of $72.60. This suggests that CDK is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.70 for WDAY and 1.80 for CDK, which implies that analysts are more bullish on the outlook for WDAY.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. WDAY has a beta of 1.88.
Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. WDAY has a short ratio of 9.25 compared to a short interest of 6.35 for CDK. This implies that the market is currently less bearish on the outlook for CDK.
CDK Global, Inc. (NASDAQ:CDK) beats Workday, Inc. (NYSE:WDAY) on a total of 10 of the 10 factors compared between the two stocks. CDK , generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. In terms of valuation, CDK is the cheaper of the two stocks on an earnings and sales basis, CDK is more undervalued relative to its price target. Finally, CDK has better sentiment signals based on short interest.