Dayforce Stock: After Rebrand, A Balanced Bull And Bear Case (NYSE:DAY) (2024)

For many tech companies, the name of the company is also the name of its anchor product. But Dayforce (NYSE:DAY) didn't make this change until just this year, when it used to be known as Ceridian. The HCM (human capital management) software company, dual-headquartered between Minneapolis and Toronto has managed to sustain double-digit growth, amid a tough macro climate in its space particularly.

Year to date, Dayforce has shed ~20% of its market value as investors have panned its results, particularly slower-than-hoped-for profit growth. In that tumble, I think there's an opportunity to reassess both sides of the bull and bear case for Dayforce:

I last wrote on Dayforce in 2022, when the stock was trading closer to ~$60 and benefiting from COVID-era tailwinds that boosted almost all tech stocks. I was bearish on the stock at the time, arguing that it was not a leading HCM company whose growth rates paled in comparison to the cloud HCM incumbent leader, Workday (WDAY). It also, arguably, has a smaller product portfolio than Workday - as it doesn't offer any finance/ERP suites like Workday does.

Since then, however, Workday has run into its own challenges with the slower hiring environment, and now growth rates between the two companies are quite comparable. And amid Dayforce's YTD reduction in shares, I no longer think there's substantial more downside left to go. In short, I am now neutral on Dayforce and believe there's a balanced bull and bear case for the company.

On the positive side: despite a more focused product portfolio than Workday, the company does continue to innovate on the HCM side. The snapshot below, taken from the company's Q1 shareholder letter, showcases its most recent releases:

Among the more interesting of these releases is a new software product aimed at serving company alumni (often an afterthought for HR departments) and an AI-driven tool for generating recruiting content (though arguably, there is a wide landscape of HR recruiting tools, including Microsoft's (MSFT) LinkedIn, that already offer similar features).

We also like the fact that Dayforce has managed to sustain mid/high teens growth despite a tough macro.

That being said, however, there are a number of risks and weaknesses to point out:

• Risk of decelerating float revenue. Float, or interest earned from Dayforce depositing customer payroll funds into interest-bearing assets, is a huge driver of revenue growth at the moment as y/y interest rate compares are easier. As the Fed prepares to cut rates (and prior year comps also show higher rates), meanwhile, this growth lever will start to dwindle.
• Debt. Dayforce has nearly $1 billion of net debt on its balance sheet, which is an anomaly in the software sector (where most companies tend to hold a large net cash position.
• Crowded landscape. HCM remains one of the most competitive areas of enterprise software (right up next to CRM), with alternatives ranging from behemoths like Workday and Oracle (ORCL) to smaller startups like Gusto and Rippling.

Valuation checkup and triggers to buy or sell

All in all, I'd consider the bull and bear cases for Dayforce to be balanced, especially considering its fair (not overly cheap, not overly expensive) valuation.

At current share prices near $50, Dayforce trades at a market cap of $8.06 billion. After we net off the $392.5 million of cash on Dayforce's most recent balance sheet against $1.22 billion of debt, the company's resulting enterprise value is $8.89 billion.

Meanwhile, for the current year FY24, Dayforce has guided to $1.73-$1.74 billion in revenue (14-15% y/y growth, roughly in-line with the first quarter) and $484-$499 million in adjusted EBITDA, or a 28.4% midpoint adjusted EBITDA margin. Importantly underlying this outlook is $183 million of float revenue, compared to a ~$60 million quarterly run rate in Q1 (sharper than expected interest rate cuts would put this at risk).

At the midpoints of this year's guidance ranges, this puts Dayforce's valuation multiples at:

• 5.1x EV/FY24 revenue
• 18.2x EV/FY24 adjusted EBITDA

For a company with mid-teens growth and ~30% adjusted EBITDA margins, I'd say these are fair multiples.

I'd be a buyer of Dayforce stock if it fell below 4.5x FY24 revenue (a $44 price target, or ~15% downside from current levels), and I'd sell Dayforce above a 6x FY24 revenue multiple ($60, ~20% higher from current levels). I do think without any meaningful near-term catalysts to swing growth, Dayforce will be stuck range-bound for awhile, so investors should add this stock to their watch list and look out for advantageous price fluctuations.

Q1 download

Dayforce initially rallied above $60 after posting its Q1 earnings print, only to give back all of this gains and decline sharply since (despite no headline news to prompt that).

Revenue in Q1 grew 16% y/y to $431.5 million. Now, this did beat Wall Street's expectations of $425.9 million (+15% y/y) by a one-point margin, but it did decelerate versus 20% y/y growth in Q4.

We do note, however, that this is a market norm. Workday - the company's closest pure-play public comp - saw comparable 18% y/y growth in Q1.

The company notes that in spite of macro headwinds, its sales pipeline remains strong. Per President Steve Holdrige's remarks on the Q1 earnings call:

In Q1, we delivered balanced and consistent growth across customer acquisition, activation, expansion, and retention. We had strong results for sales, kickoffs, and go lives. We ended the quarter with Dayforce recurring revenue per customer up 19% year-over-year, and we now have 6,575 customers live on the Dayforce platform. From a sales perspective, we continue to see strong demand for Dayforce across the globe, and saw an acceleration of competitive wins in our mid-market segment as a compliment to the continued expansion in our enterprise segments we've talked about before.

Sales pipeline remains healthy, and we see steady demand for the Dayforce full suite platform in all regions. Our partner ecosystem momentum continued into Q1, with SI-led sales growth up 35% year-over-year. We continued to demonstrate the strength of our overall Dayforce platform, attaching full suite to nearly 50% of new sales bookings. We also saw continued performance across our customer base sales motion, with customer add-on sales comprising nearly 40% of total bookings, including significant growth in our talent intelligence suite."

We will continue to point out, however, that float is a revenue driver that is largely beyond Dayforce's control. In Q1, Dayforce float revenue of $54.8 million grew 32% y/y, while more minor Powerpay float grew 20% y/y. The company is expecting total float revenue to be weaker nominally at $47 million in Q2.

We do note that on the positive side, as shown in the revenue breakout above, professional services revenue declined -7% y/y. As Dayforce matures and it's able to offload more implementation work to third-party integrators, the company can improve its margin profile (as a lot of this work is done at or below cost).

Adjusted EBITDA, meanwhile, clocked in at $129.9 million in the quarter, or a 30.1% margin; growing 24% y/y on a nominal basis and improving margins by 170bps.

Key takeaways

To me, Dayforce remains a watch-and-wait stock. Buy below $44, and sell above $60 - the company is doing decently with its growth rate roughly matching it's much more notable competitor, Workday, but its reliance on float for nearly 15% of its revenue is at risk when the Fed is expected to cut rates this year. Keep an eye on this stock, but don't rush to buy.

With combined experience of covering technology companies on Wall Street and working in Silicon Valley, and serving as an outside adviser to several seed-round startups, Gary Alexander has exposure to many of the themes shaping the industry today. He has been a regular contributor on Seeking Alpha since 2017. He has been quoted in many web publications and his articles are syndicated to company pages in popular trading apps like Robinhood.