This Stock Is One of BofA's Top Picks Offering 30% Upside Potential

On-demand financial management and human capital management, or HCM, software vendor Workday Inc WDAY, which is scheduled to report its fourth-quarter results Thursday after the market close, is poised to see stock price appreciation, according to an analyst at BofA Securities.

The Workday Analyst

Kash Rangan maintained a Buy rating and $260 price target for Workday.

The Workday Thesis

Workday is likely to report solid fourth-quarter results, with year-over-year subscription revenue growth estimated at 23.2% and subscription revenue growth at 28.8%, Rangan said.

The company is expected to report revenue upside relative to BofA's estimate, thanks to continued strength in HCM, the analyst said, citing checks.

For the fiscal-year 2021, first quarter, the analyst models 23% subscription revenue growth and 19.5% subscription billings growth.

"We are comfortable with our 1Q21 numbers and believe estimates could go higher if 4Q comes in strong," Rangan wrote in the note.

BofA said it believes fiscal year 2021 will continue to be a year of transition, with growth hand-off from HCM to FINS, with fiscal year 2022 potentially seeing revenue reacceleration.

Significant operating margin expansion is likely in 2021, according to the firm, given the less negative impact from Adpative deferred revenue writedown, core sales synergies getting even better and financials becoming a larger contributor to revenues.

"WDAY is poised to become a major ERP cloud company with high customer LTV shown by 100%+ net retention," BofA said.

The firm's $260 price target, suggesting roughly 30% upside from current levels, implied a premium valuation to peers. Workday's s higher growth, large underpenetrated TAM and potential for significant operating leverage, however, justifies the premium valuation, it said.