Clouded in Success
In this edition of the Smart Investor newsletter, we examine the stock of the global leader in human capital management software market. But first, let’s dive into the latest Portfolio news and updates.
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Portfolio Updates
❖ Dell Technologies (DELL) has deployed tens of thousands of Nvidia’s GPUs to power Elon Musk’s supercomputer project at his new AI startup xAI. Musk’s startup is building a massive facility, aiming to house at least one million GPUs, with Dell assembling large portions of the server racks for the supercomputer. Dell rapidly scaled up its deployment as it aims to capture an even more significant share of the infrastructure supply for the facility.
In other company news, Dell said it is expanding a strategic partnership with CoreWeave, an AI-focused cloud service provider, to enhance large-scale AI capabilities. This collaboration involves Dell supplying liquid-cooled IR7000 server racks equipped with Dell PowerEdge XE9712 servers, powered by NVIDIA’s GB200 NVL72 GPUs, to support CoreWeave’s Cloud Services platform. This collaboration positions Dell and CoreWeave to better compete in the rapidly evolving AI infrastructure market, providing scalable and efficient solutions to meet growing demand.
❖ Alphabet (GOOGL) has unveiled its latest quantum computing chip, Willow, marking a significant advancement in computational capabilities. This 105-qubit processor can perform complex calculations in under five minutes—a task that would take the world’s fastest supercomputers an estimated 10 septillion years, which is more than the age of the universe. Willow represents a breakthrough in quantum computing, as its developers have successfully addressed the qubit error problem by enhancing system stability by increasing the number of qubits. The advancements in Willow position Google at the forefront of quantum computing, ahead of competitors like Microsoft (MSFT), Amazon (AMZN), and IBM (IBM). Google CEO Sundar Pichai highlighted Willow’s potential to revolutionize industries like drug discovery and energy.
In other company news, Alphabet’s autonomous driving technology startup Waymo announced that Waymo One, its robotaxi service, will be expanding to Miami, Florida. The company plans to have its fleet ready for testing in early 2025 and should be available for passenger service by 2026. The company said it will use its all-electric fleet in partnership with Moove, a fleet management and mobility solutions provider.
❖ Uber Technologies (UBER) saw its stock fall on the news about Waymo’s expansion to Miami, and particularly due to the fact that this time the startup is working with another fleet manager. This is in contrast to Waymo’s partnership with Uber in bringing autonomous rides to Austin and Atlanta, where Uber acts as a fleet manager and as a ride facilitator through the Uber app.
Waymo is already delivering autonomous rides in San Francisco, Los Angeles, and Phoenix, and could potentially become a significant competitor to Uber, which dominates ride-hailing today. However, according to Bank of America analysts, Waymo is not an existential threat to Uber. In fact, they noted that the firm could actually benefit from the rise of AV players. With its well-established brand and massive user base of 161 million monthly active users, BofA believes Uber is well-positioned to partner with AV providers and turn potential competition into opportunity. Moreover, JMP Securities analysts said that over 40% of ride-sharing costs go to driver labor, and as technology replaces this variable cost with fixed costs, adoption of ride-sharing services will increase, expanding the market and benefitting Uber.
Meanwhile, Uber has collaborated with a Chinese autonomous driving technology leader WeRide to launch an autonomous mobility service in Abu Dhabi, marking the first time AVs are available on the Uber platform outside of the U.S., as well as the largest commercial robotaxi service outside the U.S. and China. Tawasul Transport, a leading UAE national transport company, will act as the fleet operator. Starting immediately, Uber riders in Abu Dhabi requesting UberX or Uber Comfort may be matched with a WeRide AV for qualifying trips. Uber’s commitment to capitalizing on the advancement of autonomous driving is also underlined by similar agreements with several other self-driving companies, including Waymo, Wayve, Cruise, and more.
❖ Intuit (INTU) and Amazon (AMZN) have announced a strategic partnership to support Amazon’s third-party sellers with financial management solutions. Under the deal, Intuit’s AI-driven platform QuickBooks will be the preferred partner integrated into Amazon Seller Central, with the rollout expected in mid-2025.
❖ Amazon (AMZN) has seen its stock climb in response to a slate of positive news emanating from the company’s Amazon Web Services’ re:Invent conference, where the tech giant showcased its role in the world of generative AI and unveiled service and technology announcements. According to several analysts, the announcements confirm that AWS has caught up with rivals, particularly Microsoft’s (MSFT) Azure, in terms of AI cloud platform services.
In particular, AWS has introduced Amazon Nova, a new generation of foundation models (FMs) designed to enhance AI capabilities across various applications. These models are accessible through Amazon Bedrock, AWS’s fully managed service that provides a selection of high-performing FMs via a single API. With the launch of Nova, the tech giant is joining in on a surging market of customizable AI.
Oppenheimer analysts said that “AWS remains the best in the world at creating cloud infrastructure and the tools surrounding it,” while Roth MKM analysts named the stock their Top Mega Cap pick for 2025. Wedbush analysts praised Amazon’s “competitive positioning relative to peers” in AI cloud infrastructure, applauding the progress on the company’s proprietary AI and general-purpose cloud workload chips, which demonstrate competitive performance and cost advantages, making them viable alternatives to traditional processors and accelerators in various computing and AI workloads.
❖ Oracle (ORCL) shares dropped following fiscal Q2 results that fell slightly short of expectations. Although revenues rose by 9% YoY and non-GAAP EPS expanded by 10%, these growth rates disappointed investors. However, Wall Street analysts continue to praise the IT giant amid continued strong growth in its cloud business, saying that the current stock drop is a buying opportunity. Cloud revenue soared 24% YoY, on track to cross $25 billion this fiscal year, while cloud infrastructure revenue surged by 52%, driven by record AI demand. In addition, Oracle’s RPOs (remaining performance obligations, i.e., future commitments from contracts) jumped by 49% YoY.
According to Piper Sandler analysts, Oracle has registered its fourth consecutive quarter of accelerating RPO growth, which reinforces their view that the company is in the midst of a “multi-quarter growth reacceleration that could evolve into a multi-year acceleration, underpinned by cloud and AI secular tailwinds.” Mizuho analysts added that “Oracle’s broad portfolio of infrastructure and application products, its multi-cloud strategy through hyperscaler partnerships, and unprecedented AI demand position it well to reaccelerate growth.”
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Portfolio Stocks Under Review
❖ Adobe (ADBE) remains under review despite a strong performance in the past month following almost a year of trading sideways. The company’s FQ3 results and guidance were met with hesitation as investors were concerned about signs of decelerating growth and worried about Adobe’s competitiveness in the rapidly evolving AI-powered software market.
However, recent developments suggest that Adobe stock may be poised for a strong rebound. In particular, the company has sustained double-digit growth while making remarkable progress in enriching its AI capabilities. ADBE has merged AI into its software across platforms, leading to customer enthusiasm and drawing praise from analysts, who view Adobe’s approach of adding AI features to its offerings as a path to fortify the company’s market position while streamlining its AI monetization process.
Wall Street brokerages rate ADBE as a “Buy,” with an average price target implying a ~20% upside over the next 12 months. According to Goldman Sachs, Bank of America, and others, Generative AI tools will be a meaningful component to Adobe’s revenue growth. However, the jury is still out on ADBE, and these assumptions will be put to the test today after hours, when ADBE reports its FQ4 earnings.
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Portfolio Earnings and Dividend Calendar
❖ The Q3 2024 earnings season is almost over, but several Smart Portfolio holdings are still scheduled to release their quarterly results in the next few weeks. Thus, Broadcom (AVGO) is scheduled to post its quarterly results on Thursday after hours.
❖ The ex-dividend dates for Taiwan Semiconductor Manufacturing (TSM), Dick’s Sporting Goods (DKS), Amphenol (APH), and Salesforce (CRM) are coming in the next several days.
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New Buy: Workday (WDAY)
Workday, Inc. provides enterprise cloud applications for financial management, human capital management, and analytics. Headquartered in Pleasanton, California, the company serves organizations of all sizes and industries worldwide, helping them streamline operations and drive decision-making through its software-as-a-service (SaaS) solutions. Workday’s platform is widely used by businesses to manage workforce planning, payroll, and financial performance, with a focus on scalability and innovation.
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History of Smart Work
Founded in 2005, Workday initially focused on R&D to develop an innovative software-as-a-service (SaaS) platform that streamlined HR and finance processes, positioning itself as a leader in enterprise cloud applications.
Workday’s growth trajectory accelerated through strategic acquisitions that expanded its capabilities in big data analytics, financial planning and management solutions, employee engagement, external workforce and vendor management, and other important adjacent fields. In the past five years, it made several strategic buyouts, including two in 2024. In March, WDAY bought HiredScore, an AI-driven talent orchestration platform, and in September, it announced the acquisition of Evisort, an AI-native contract intelligence platform.
These strategic acquisitions not only expanded Workday’s product offerings but also increased its total addressable market (TAM) and strengthened its position across various end markets, including financial services, professional services, and technology sectors. The company also pursued key partnerships, collaborating with major cloud providers like AWS and global consultancies such as Deloitte to scale its offerings and expand internationally.
Workday, Inc. has consistently allocated a significant portion of its revenue to research and development (R&D) to drive innovation and enhance its product offerings. In fiscal year 2024, R&D expenses represented ~34% of the company’s total revenue. By investing heavily in R&D, Workday continuously enhanced its product portfolio, integrating advanced technologies like machine learning (ML) and artificial intelligence (AI) into its platform to improve automation and decision-making for enterprises.
Throughout the 2010s and 2020s, Workday experienced consistent organic growth, supported by its reputation for customer satisfaction and innovation. The company strategically expanded into new markets, including student systems for higher education and industry-specific solutions for healthcare and financial services.
With a focus on innovation, strategic acquisitions, and strong partnerships, Workday has become a global leader in cloud-based enterprise solutions. The company currently serves thousands of organizations, including over 50% of the Fortune 500, and remains a key player in helping businesses adapt to evolving workforce and financial management needs.
Workday went public in 2012 with a market capitalization of approximately $7.8 billion, which has risen almost tenfold since then, reaching over $73 billion. Moreover, in June 2024, it made its debut on the Fortune 500, with booming revenues granting it the #490 spot on the list. Moreover, the company’s steady, strong growth has led S&P Dow Jones Indices to announce that WDAY will be included in the S&P 500 index on December 23rd.
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Distinguished Business
Workday operates on a subscription-based model, delivering cloud-based enterprise applications for human capital and financial management. Clients pay recurring fees for access to its integrated platform, which includes services like payroll, talent management, and financial planning.
The subscription-based model – with recurring revenues comprising about 90% of total – ensures consistent income streams, high revenue predictability, and fosters long-term customer relationships. Additionally, Workday offers professional services, such as deployment and support, to assist clients in effectively implementing and utilizing its solutions.
The company has distinguished itself in the enterprise cloud application market through several key differentiators. It offers a unified cloud-based platform that seamlessly integrates human capital management (HCM) and financial management applications. This integration enables organizations to manage HR and financial operations cohesively, providing real-time data access and analytics for informed decision-making. In addition, the platform’s configurable business process framework and intuitive user interface support dynamic business environments, while enhancing user experience and facilitating efficient interaction.
Moreover, WDAY’s platform provides advanced analytics and reporting capabilities, helping corporate customers optimize their operations and decision-making processes. Another point of strength is continuous innovation, as Workday constantly invests in incorporation of advanced technologies like AI and ML into its offerings. For example, during the latest quarter, WDAY unveiled Workday Illuminate, the next generation of Workday AI and also introduced a set of new AI agents.
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Surging Earnings, Healthy Finances
Despite the multiple acquisitions and heavy R&D investments, WDAY’s financial health is close to perfect. The company significantly reduced its debt over the past five years; currently its cash and cash equivalents far surpass the amount of debt on its balance sheet.
Workday also displays strong profitability and capital efficiency metrics, with ROE and ROA making the top 20% of its industry. The company also shines in terms of gross, FCF, and net profit margins, which rank in the top 10% of its industry. In contrast, WDAY’s operating margin is in line with the industry average due to significant operating expenses (R&D, sales, and marketing) and strategic investments for long-term growth.
However, in August, the company announced a strategic pivot, shifting its focus towards enhancing profitability. Workday now aims to achieve a non-GAAP operating margin of approximately 30% by fiscal year 2027, versus the previous goal of 25%. The company plans to use several strategies for margin expansion, including streamlining operations, maintaining cost discipline, and utilizing its partner ecosystem more effectively. Importantly, WDAY remains committed to growth initiatives, including international expansion and the development of AI-oriented solutions.
In many cases, recurring revenue-based business models help achieve steady, albeit modest, growth rates. However, WDAY has achieved rapid growth through several strategic initiatives. These include a broad, diversified product portfolio, capability extension through acquisitions, focus on innovation, emphasis on customer retention, and constant expansion into new markets.
As a result, over the past three years, its revenues have grown at a CAGR of ~19%. In the same period, Workday’s adjusted EPS has surged at a CAGR of 271% (!). The earnings leap can be attributed to operating leverage, improved operational efficiency, and strategic financial management, including share repurchases. The company has consistently surpassed analysts’ earnings estimates, registering high double-digit year-on-year EPS growth rates in every quarter since fiscal Q4 2023 (ended January 31, 2023).
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Opportunity to Buy the Dip
Workday’s stock has declined after the company’s FQ3 2025 report on November 26th – despite strong quarterly results – as investors were spooked by a slightly weaker-than-expected forecast for the current quarter and next fiscal year’s subscription revenue. The company’s management said that WDAY has sealed several large strategic deals during the quarter, but revenue recognition from these sales is expected to lag, as sales cycles continue to be longer than in fiscal year 2024.
Wall Street analysts, on the other hand, remained unphased by the lower revenue growth forecast, applauding WDAY’s steady progress towards margin goals as demonstrated by the quarterly results and further bolstered by the raised operating margin guidance for fiscal 2026. In addition, analysts see continued strong demand for the company’s AI solutions, which is expected to ramp up earnings momentum. Most analysts from leading Wall Street brokerages rate the stock a “Buy,” saying that despite near-term challenges, Workday is well-positioned to increase its market share and continue on the path of long-term growth.
Meanwhile, the dip in Workday’s shares has created an opportunity to gain exposure to the HCM leader at a ~35% discount to their historical valuations. Although the stock’s multiples are higher than the IT sector’s averages, they come towards the bottom of the valuation scale for comparable industry peers, with only the slow-growth giant ADP displaying lower multiples than WDAY. Moreover, based on its future cash flows, Workday’s stock appears to be undervalued by about 30%.
Going forward, Workday’s shares are expected to continue being supported by its strategic buybacks. In February 2024, the company’s board approved a new share repurchase program of up to $500 million, completing the buybacks under the program in FQ3 2025. In August, WDAY announced a new program, authorizing buybacks of up to $1 billion, with $902 million remaining for repurchase as of October 31st, 2024 (the end of FQ3).
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Investing Takeaway
Workday, Inc. is a leader in cloud-based enterprise solutions, distinguished by its strong innovation, operational execution, and strategic management. The company’s robust financial health, with consistent revenue growth, expanding margins, and exceptional cash generation, enables it to invest heavily in R&D and strategic acquisitions, supporting long-term growth, while maintaining a solid balance sheet. Workday’s focus on AI-driven solutions, its growing international presence, and demonstrated ability to secure large enterprise deals position it to gain market share and further expand its total addressable market. With a clear path to achieving its financial targets and ongoing share repurchase programs supporting shareholder value, we expect Workday’s stock to sustain its long-term growth trajectory. As such, we view WDAY as a valuable addition to the Smart Investor Portfolio.
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New Sell 1: Synopsys (SNPS)
Synopsys, Inc. is the world’s leading provider of electronic design automation (EDA) solutions and services. The company is also a leading global player in intellectual property (IP) integration solutions, as well as system verification and validation.
Synopsys is the global leader in electronic design automation solutions, holding the largest market share globally (about 33%). The company heads the “big three” EDA leaders, and along with Cadence Design Systems and Siemens holds about 85% of the global market. Thanks to its market position, SNPS continues to be a key beneficiary of increasing chip complexity and the AI capex cycle boom, both of which support the projected continued fast growth of the EDA market. In addition, SNPS’s ability to continually develop IP for the latest technologies and ship them faster than competitors, helped it reach a #1 global position in IP license revenues with a 32% market share in 2023.
Synopsys boasts outstanding financial health and industry-leading capital efficiency and profitability metrics. In the past, it registered steady, but somewhat slower earnings growth than one would expect from an industry leader in the IT sector. However, earnings growth accelerated in recent years, thanks to the advance of AI and silicon proliferation, which have significantly increased the complexity of semiconductor designs, driving demand for the company’s offerings. Analysts expected continued acceleration going further.
Investor optimism towards Synopsis took a hit last week, however, and the stock subsequently plunged. Although the company reported better-than-expected results for its fiscal Q4 2024, outlook for fiscal 2025 disappointed, falling short of analyst estimates. SNPS provided weak guidance for FY25, implying 10%-11% revenue growth, a notable deceleration.
One of the key reasons for the expected deceleration in revenues in the current fiscal year is the pessimistic outlook for China’s semiconductor industry. SNPS’s Chinese business, accounting for over 15% of the total revenue, has witnessed a slowdown in growth rates over the past few quarters. This trend is not expected to change any time soon, further hindering demand for the company’s Chinese business. At the same time, the increasing advanced technology trade spat between the U.S. and China introduces another unknown into Synopsis’ revenue projections.
Moreover, the company described the current scenario as a “tale of two markets,” with strong demand from companies involved in AI infrastructure, while others – operating in mobile, PC, automotive, and industrial sectors – experiencing a slowdown in their refresh cycles. As Synopsys is linked to these sectors’ R&D, it is maintaining stability but not experiencing growth comparable to its AI-focused clients.
We expect Synopsis’ growth to reaccelerate towards the end of fiscal 2025 on the back of the refresh cycle improvement thanks to easing financing-cost environment, as well as increased share of revenues arriving from AI-related corporate clients. In addition, markets should gain more clarity vis-à-vis Chinese demand and trade restrictions in the next few months. Moreover, the planned acquisition of simulation software company Ansys – expected to be closed in the first half of FY25 – is a growth-positive development that should generate significant revenue and expense synergies for Synopsys.
However, at the moment, SNPS looks notably overvalued compared to its anticipated revenue growth deceleration in fiscal year 2025 and the China-related uncertainty, prompting us to sell the stock to avoid further downside. We certainly plan to revisit this industry leader in the future, especially if the current downward momentum reduces multiples to the level where potential stock upside is more promising.
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New Sell 2: Applied Materials (AMAT)
Applied Materials, Inc. is a leading developer, manufacturer, and supplier of semiconductor fabrication equipment. The company specializes in creating advanced manufacturing systems designed for high-volume production, aiming to enhance efficiency and reduce the cost of electronic devices. AMAT’s materials engineering solutions are used to produce virtually all new chips and advanced displays in the world.
Applied Materials boasts a rock-solid balance sheet and exceptionally strong profitability and capital efficiency metrics. However, the company was placed in our “under review” bracket a few weeks ago due to short-term trends affecting earnings growth and investor sentiment.
The company’s exposure to China is notably high, with revenues from the country reaching a third of AMAT’s revenues. This exposure, among other reasons, led Morgan Stanley analysts to downgrade their rating on Applied to “Sell,” cutting their price target to the level implying further downside for the stock after a ~10% drop over the past month. The U.S. government’s restrictions on China’s access to advanced memory chips and related equipment may have a notable adverse impact on the company’s sales. Meanwhile, the incoming Trump administration may further enhance these measures, creating uncertainties for the company.
Morgan Stanley’s downgrade is also attributed to AMAT’s significant exposure to the DRAM and trailing-edge logic markets, which has grown in recent years with the rise of chip use across industries and the advance of IoT and automotive chip markets. While these sectors contributed to strong growth in 2023 and 2024, a projected downturn in the first half of 2025 is expected to adversely affect AMAT’s performance.
The slowdown in these end markets is attributed to DRAM and trailing-edge market dynamics (i.e., increased device longevity reducing demand), market saturation in consumer electronics and fluctuations in automotive sector demand, among other developments. These factors are expected to continue impacting the broad semiconductor sector outside of the AI and HPC spheres, which could harm Applied Materials.
We believe that AMAT’s exceptional operational prowess, leading market position, technological edge, and the ability to capitalize on future semiconductor advancements will support its stock performance in the long term. We plan to return to this industry leader as soon as geopolitical headwinds subside and the semis market cycle turns for the better. However, for now, we believe it is prudent to sell the stock, locking in gains.
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Smart Investor’s Winners Club
The 30% Winners Club includes stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.
Despite the volatility in the markets in the past few days, our exclusive club’s ranks remained unchanged except for the downfall of AMAT. The Winners Club now includes 16 stocks: GE, ANET, AVGO, EME, TPL, ORCL, TSM, HWM, PH, APH, ITT, IBKR, PNR, CRM, KKR, and PYPL.
The first contender is still AMZN with 25.34% gain since we purchased it on September 11th. Will it close the gap, or will another stock outrun it to the finish line?
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Disclaimer
The information contained in this article represents the views and opinions of the writer only, and not the views or opinions of TipRanks or its affiliates and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy, or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices, or performance.
