Software Stocks Under Pressure
The software space is soft as a whole, with higher bond yields pressing on stocks. Workday (WDAY) ranks among the worst performers on the S&P today.
Workday (WDAY): Two Downgrades
Two analyst downgrades hit Workday (WDAY), one from Deutsche Bank and one from BTIG. Both view the stock as having run up too far.
Deutsche Bank cut it to hold from buy, with a $220 price target - above the current $194 and change. They cite valuation after the recent rally and see a more balanced risk-reward at this level.
BTIG moved to neutral from buy with no price target. Shares are priced for a buyout after recent reports. BTIG doubts Workday will chase big margin growth while its low double-digit organic subscription revenue growth keeps slowing. It sees possible upside if the private equity firm secures financing for a takeover worth more than $50 billion, but now views the risk-reward as balanced even if those talks fail.
The twist: rumors that private equity could buy Workday. Last week brought reports about Silver Lake taking it over, and the stock had its best trading session in a decade after that. The deal is not guaranteed - reports only say the two sides have held discussions, with no agreement reached. Hopes ran high because Silver Lake helped Dell so much, but there is no confirmation.
Workday has broken out of its earlier decline this year. It rallied from June lows near $113, traded over $200 last week, and was up more than 20% month-to-date on the buyout news. Part of the rally came from a recovery off earlier AI pressure.
Okta (OKTA): Upgrade From Wells Fargo
Okta (OKTA) is only fractionally lower this morning despite an upgrade. Wells Fargo raised it to overweight from equal weight, with a $180 price target, up from $150. Their field work shows conviction in the company's base case for durable low-teens growth, which should limit downside in the shares, while the chance of AI upside keeps rising. Wells sees growing evidence that Okta's core demand is improving and treats low-teens growth as the base case with room for more.
Okta currently trades at $147. It has been a turnaround story from valuation lows, driven by enterprise spending on cybersecurity - IT budgets for this are set and not optional. The company is turning a corner on profitability after heavy investment. It reported strong Q1 earnings and raised guidance. Sentiment grew more bullish over the summer, with several price target boosts in the last couple of months.
Alibaba (BABA): AI Downloads and Asset Sale
Alibaba (BABA) is up 0.8% on two news items ahead of earnings. Its open-weight AI models have passed more than 3 billion global downloads in six months, overtaking Meta (META) and Alphabet (GOOGL) in open-source models.
Alibaba is also selling its gaming unit in a deal worth $1.5 billion. Per Bloomberg, Asian private equity firm True Star Capital has agreed to buy it. The company is shedding non-core assets to focus on artificial intelligence.
The timing of both announcements matters, since earnings come this Thursday. Focus will fall on AI and on monetization, with investors wanting profitability and margin recovery given domestic conditions. This follows weak Chinese economic data overnight, as that economy keeps slowing - so the stock gets a small boost today. Alibaba has climbed from $91 at the end of June to $124 now.
