Workday (WDAY) FQ3 Earnings Preview / Trade Ideas

by Dan November 19, 2020 12:56 pm • Trade Ideas

Workday (WDAY) will report its FQ3 earnings today after the close. The options market is implying about a $15, or 6% move in either direction tomorrow, which is basically inline with the 4-quarter and long-term average one-day post-earnings move.

With the stock near $230, the Nov weekly 230 straddle (the call premium + the put premium) is offered at about $16, if you bought that and thus the implied one-day movement you would need a rally above 246 or a decline below 214 to make money by tomorrow’s close.

Shares of WDAY have massively outperformed the S&P 500’s 10% year to date gains, up 39% on the year, and besting the Nasdaq’s 32% gains. The one year chart is really a work of art, with two lines that really matter the uptrend from late March which the stock is currently straddling, and then below that support just above $200, the stock’s breakout level from late August, and a level it held earlier this month:

Since filling in its Q2 earnings gap, the stock has been basing above the breakout level and today’s looks to be poised for a retest of the prior highs if the company were to post a greater than expected beat and raise, with the implied earnings move very ear the all-time high on Aug 28.

Expectations are clearly high into the print, as is the stock’s valuation trading about 90x F2021 eps and 13x sales. It also makes sense to consider enterprise software vendor and WDAY peer’s commentary last month, that saw the stock crater nearly 25% the day following their outlook, per Barron’s:

“While SAP continues to see robust interest in its solutions to drive digital transformation as customers look to emerge from the crisis with more resilience and agility, lockdowns have been recently re-introduced in some regions and demand recovery has been more muted than expected,” the company said. “Further and for the same reasons, SAP no longer anticipates a meaningful recovery in SAP Concur business travel-related revenues for the remainder of the year 2020.”

And the company said it expects muted revenue growth and flat to slightly lower operating profit over the next two years, with acceleration starting in 2023.

Citi analyst Walter Pritchard says investors are likely to see the SAP warning as a negative for any software company with exposure to large deals where sales cycles could be similarly disrupted, including Oracle (ORCL), Workday (WDAY), ServiceNow (NOW) and others. He also says the company’s decision to accelerate its transformation to the cloud could add to concerns about other legacy companies going through similar transitions, including Citrix (CTXS) and VMware (VMW).

So what’s the trade? 

If WDAY were to offer a more optimistic outlook than SAP, and better than expectations, the stock likely pushed towards the prior high on a knee-jerk reaction, but might we see the sort of gap-fill after the last quarter’s results?

If I were inclined to play for a quick pop I might consider a call calendar, selling a weekly out of the money call and buying a longer-dated call of the same strike, for instance:

Bullish Trade Idea: WDAY ($230) Buy Nov – Dec 245 call calendar for $4

-Sell to open 1 Nov 240 call at $4

-Buy to open 1 Dec 240 call for $8

Break-even on Nov expiration (tomorrow):

The ideal scenario is that the stock is very near 240, the short Nov 240 call will lose most of its value as it expires tomorrow but the Dec has gained value picking up deltas.

Or

If I were inclined to play for a pullback towards $200 in the coming weeks I might consider a Put Butterfly in next week’s expiration, for instance:

Bearish Trade Idea: WDAY ($228) Buy Nov 27th weekly 520 – 500 – 180 put butterfly for $3,25

-Buy to open 1 Nov 27th weekly 520 put for $5

-Sell to open 1 Nov 27th weekly 500 puts at $1 each of $2 total

-Buy to open 1 Nov 27th weekly 180 put for 25 cents

Break-even on Nov 27th weekly expiration:

Profits of up to 16.75 between 516.75 and 183.25 with max gain of 16.75 at 200

Losses of up to 3.25 between 516.75 and 520 & between 180 and 183.25 with max loss of 3.25 above 220 or below 180

Rationale: this trade structure risks ~1,5% of the stock price and has a potential of 5x the premium at risk if the stock is 200 in a week.