Workiva (WK) provides corporations, governments, and non-profits a cloud-connected reporting and compliance platform. Importantly, the Workiva platform offers tools for collaboration, data linking and integration, permission setting, and a full audit trail for business users, primarily in the context of financial and statutory reporting. The main use case for Workiva’s software, as far as I can tell, is for SEC filings. Specifically, Workiva allows companies to streamline the process of filing annual and quarterly report with the SEC and to comply with the SEC’s requirement to tag data in their financial statements with XBRL, which is an international data standard for machine-readable reporting of financial, performance, risk, and compliance information. Other, smaller use cases include Non-Regulatory Reporting, Integrated Risk (e.g., Sarbanes-Oxley compliance), and Financial Services (e.g., CCAR stress testing for the Federal Reserve).
The company is headquartered in Ames, Iowa and as of the end of 2019 had approximately 1,600 employees.
Earnings and Financial Health
In its most recent quarter (Sep 2020), WK posted $88 million in revenue, a gross profit margin of 75%, and operating expenses of $74 million, resulting in a net loss of $10.5 million and an EBITDA of minus $3.5 million.
In the prior eight quarters, quarterly sales have risen from about $65 million to just under $90 million, while gross profit margin has ranged from the low to mid-70s.
The company is not profitable as operating expenses have risen in tandem with sales, although in the most recent quarter operating expenses did decline sequentially $4.5 million. Additionally, the company is cash flow positive, generating $18 million in free cash flow during the most recently reported quarter. WK had shown a strong upward trend in free cash flow during 2019 before declining significantly in Q1 of 2020 with the onset of the pandemic. In Q2 and Q3 of 2020, the uptick in free cash flow seems to have resumed.
Finally, the company has no long-term debt on its books and shows shareholder’s equity of $79.5 million as of the most recent quarter.
Source: Self-generated from Quarterly Financial Data on Barchart.com
Market Opportunity and Growth: The Long-Term View
Workiva launched in 2010 and has achieved significance penetration among the Fortune 500. As of 2019, the company had over 3,500 customers, including 75% of the Fortune 500. Much of its revenue (96%) is generated in North America.
The core growth drivers for Workiva include:
- International Expansion. Here, the company intends to bring its core suite of solutions to foreign private issuers who report to the SEC and to European companies who report to The European Securities and Markets Authority and The Financial Conduct Authority in the U.K.
- Global Statutory Reporting. Under this heading, Workiva aims to deliver solutions for companies looking to meet tax reporting requirements in different countries and local jurisdictions. According to the company, their early efforts in this area have validated the demand for this and their product fit as well as the lack of significant competition.
- Integrate More Systems of Record. Under this potentially significant area of expansion, Workiva will build more data connectors and APIs so that is platform can directly integrate with other common business data systems such ERP, HCM, and CRM tools.
Putting this all together, along with growth from existing customers, the company estimates 14% average revenue growth over the next 5 years. With expense discipline and a continuation of its free cash flow trend, WK has the potential to be a winner over the long term.
Options Picture: The Short-Term View
Workiva’s addressable market and its growth drivers form a basis for a long-term holding in its stock. But what about the short-term view? In light of its recent performance, does the current price provide an attractive entry point into this holding?
Based on technical factors, I argue the answer is no and that at the current price, the stock is overbought. Using the same technical factors, however, short-term traders can benefit from a put spread strategy on the stock.
The chart below plots WK along with its Bollinger Bands and Keltner Channels. Below the volume bars are plots of the Average Directional Index (ADX) and Relative Strength Indicator (RSI). The Bollinger Bands show a 20-day moving average of the stock price, with upper and lower bands at +/- 2 standard deviations away from the 20-day moving average. The Keltner Channels, based on the average true range, adjust for the volatility of the stock. Finally, the ADX indicates the strength of the current trend, while the RSI points to whether the stock is overbought or oversold.
In general, when putting on an options trade, I try to answer two questions: (1) Is the stock in a period of increased volatility, and (2) is the current trend, either bullish or bearish, expected to turn in the short-term. The technical indicators outlined above can help answer these two questions.
From the charts of the technical indicators, I infer 3 things:
- WK is entering a period of increased volatility because the current market price is outside of the Bollinger Band and far outside the Keltner Channel.
- The current trend (i.e., bullish) is strong based on the ADX of 53.5.
- The trend may turn into a bearish one based on the RSI, as it has recently declined from 79 on 12/22 to below 70.
So from this analysis, I see three potential options:
Initiate a long-term position in WK based on the attractiveness of its product and market opportunity. Initiate a bearish option position with a minimal capital outlay and no long-term view of the stock:
- Buy an at-the-money put and sell an out-of-the-money put for a debit balance and the potential to double the debit paid. For example, buy the $95 put expiring Jan 15, 2021 for $550 and sell the $90 put with same expiration for $270.Initiate a bearish option position with a high capital outlay but a positive long-term view of the stock:
- Simply sell a $90 (or lower) strike price put, collect $270 in premium for the Jan 15, 2021 expiration, and set aside $9,000 in capital in case of exercise.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.