Which HCM software stock is a better buy?

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Human Capital Management (HCM) software helps employers manage and care for their employees. Even though cloud security remains a barrier to the adoption of HCM software, the growing demand from almost all industries as part of their digital transformation and cost reduction efforts is expected to drive the growth of the HCM software market. Additionally, as hybrid working is expected to continue for the foreseeable future, the demand for HCM software is expected to remain stable. Moreover, the future looks bright for the HCM software industry owing to the steady progress in the Artificial Intelligence (AI) and Machine Learning (ML) space. According to a report by Mordor Intelligence, the human capital management software market is set to grow at a pace 6.7% CAGR by 2026. Therefore, Workday (WDAY) and Ceridian HCM Holding (CDAY) should benefit.

WDAY provides enterprise cloud applications that help its customers manage critical business functions and optimize their financial and human resources. The company offers a suite of financial management applications, which allow CFOs to maintain accounting information in the general ledger. CDAY operates as an international human capital management software company. The company offers Dayforce and Powerpay. It also provides desktop solutions for payroll and payroll-related services and sells its solutions through a 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 outsourced workforce management technologies and cloud-based providers. The combination will provide customers with a unified workforce optimization solution to manage all types of workers, increasing demand for its solution.

On February 23, 2022, CDAY announced Dayforce Wallet Rewards, a new cashback program for Dayforce Wallet, an industry-leading compensation solution that provides employees with anytime access to their earned pay. Seth Ross, Managing Director, 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. Non-GAAP operating income from the company grew 23.9% year-over-year to $332.25 million, while its non-GAAP net income revenue was $286.58 million, which represents a 30.4% year-over-year increase. Additionally, its non-GAAP EPS was $1.10, up 27.9% year-over-year.

CDAY’s revenue increased 26.6% year over year to $282.10 million for the fiscal fourth quarter ended December 31, 2021. The company’s adjusted EBITDA increased by 16. 9% year over year to $38.70 million. However, its adjusted net income was $9.30 million, down 33.6% year-over-year. Additionally, 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 have grown at CAGRs of 23.2% and 23.6%, respectively, over the past three years. Analysts expect WDAY’s revenue to grow 18.7% in fiscal 2022 and 19.4% in fiscal 2023. The company’s EPS is expected to increase 33.4 % in fiscal 2022 and decline 8.7% in fiscal 2023. Additionally, its EPS is expected to grow 15.8% annually over the next five years.

On the other hand, CDAY’s revenue and total assets have grown 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 increase 48.5% in fiscal 2022. fiscal 2022 and 46.9% in fiscal 2023. Additionally, CDAY’s EPS is expected to grow 12% annually. over the next five years.

Profitability

WDAY’s revenue over the last 12 months is 4.88 times greater than that generated by CDAY. WDAY is also more profitable with gross profit margin and leverage FCF margin of 73.08% and 35.32% compared to CDAY’s 42.57% and 13.82%, respectively

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

Evaluation

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

Thus, WDAY is relatively affordable here.

POWR Rankings

WDAY has an overall rating of B, which is equivalent to a purchase in our own POWR Rankings system. On the other hand, CDAY has an overall rating of D, which translates to a sell. POWR ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

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

Additionally, WDAY has a B rating for quality. This is warranted given WDAY’s 12-month CAPEX/sales of 4.90%, 116.2% higher than the industry average of 2.26%. On the other hand, CDAY has a quality rating of F, in line with its 1.12% year-over-year CAPEX/sales, 50.4% below the industry average of 2.26%.

Of the 164 shares of Software app industry, WDAY is ranked #29. In comparison, CDAY is ranked #131.

Beyond what I said above, we also scored stocks for Momentum, Value, Stability and Sentiment. Click here to see all WDAY ratings. Also get all CDAY ratings here.

The winner

Rapid digital transformation and growing demand for cloud-based HR processes are expected to drive the growth of the HCM software market. While WDAY and CDAY are both expected to win, it is best to bet on WDAY now due to its lower valuation and higher profit margin.

Our research shows that the odds of success increase when investing in stocks with an overall buy or strong buy rating. See all other top rated stocks in Software – Applications here.


Shares of WDAY remained unchanged in after-hours trading Thursday. Year-to-date, WDAY is down -18.60%, compared to a -9.82% rise in the benchmark S&P 500 over the same period.

About the Author: Nimesh Jaiswal

At Nimesh Jaiswal His passionate 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 the price of a stock is the key approach he follows while advising investors in his articles. Continued…

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