Over the past six months, Workiva’s stock price fell to $61.97. Shareholders have lost 18.5% of their capital, which is disappointing considering the S&P 500 has climbed by 5.7%. This might have investors contemplating their next move.

Following the pullback, is now a good time to buy WK? Find out in our full research report, it’s free.

Why Does Workiva Spark Debate?

Nicknamed "the Excel killer" by some finance professionals for its ability to eliminate spreadsheet chaos, Workiva (NYSE: WK) provides a cloud-based platform that enables organizations to streamline financial reporting, ESG, and compliance processes with connected data and automation.

Two Positive Attributes:

1. ARR Surges as Recurring Revenue Flows In

While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.

Workiva’s ARR punched in at $877.3 million in Q4, and over the last four quarters, its year-on-year growth averaged 21.7%. This performance was impressive and shows that customers are willing to take multi-year bets on the company’s technology. Its growth also makes Workiva a more predictable business, a tailwind for its valuation as investors typically prefer businesses with recurring revenue.

2. Elite Gross Margin Powers Best-In-Class Business Model

Software is eating the world. It’s one of our favorite business models because once you develop the product, it usually doesn’t cost much to provide it as an ongoing service. These minimal costs can include servers, licenses, and certain personnel.

Workiva’s robust unit economics are better than the broader software industry, an output of its asset-lite business model and pricing power. They also enable the company to fund large investments in new products and sales during periods of rapid growth to achieve outsized profits at scale. As you can see below, it averaged an excellent 78.5% gross margin over the last year. That means Workiva only paid its providers $21.53 for every $100 in revenue.

The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. Workiva has seen gross margins improve by 3 percentage points over the last 2 year, which is very good in the software space.

One Reason to be Careful:

Operating Margin Rising, Profits Up

While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.

Over the last two years, Workiva’s expanding sales gave it operating leverage as its margin rose by 5.6 percentage points. Although its operating margin for the trailing 12 months was negative 4.8%, we’re confident it can one day reach sustainable profitability.

Final Judgment

Workiva’s merits more than compensate for its flaws. After the recent drawdown, the stock trades at 3.4× forward price-to-sales (or $61.97 per share). Is now a good time to buy? See for yourself in our comprehensive research report, it’s free.

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