We recently compiled a list of the Jim Cramer’s 10 Stock Picks That Could Change Your Investment Game. In this article, we are going to take a look at where Workday Inc. (NYSE:WDAY) stands against the other stocks that could change your investment game according to Jim Cramer.
Tech Stocks Shine When Rates Are High but Struggle After Rate Cuts, Says Cramer
In a recent episode of Mad Money, Jim Cramer points out that tech stocks often perform well when the Federal Reserve maintains high interest rates and the economy slows down. However, when the Fed cuts rates, as it did recently, Wall Street shifts its focus to companies that can show significant earnings growth due to these lower rates. This may seem confusing, but in the stock market, cash is limited, and it’s currently flowing into companies that would struggle without the rate cuts. While many stocks initially rose after the cut, they couldn’t maintain those gains, leading to a market decline.
“The thing is, these tech stocks tend to be winners when the Fed keeps rates high and the economy slows. But when the Fed slams on the accelerator, as it did today, Wall Street bands together and piles into the companies that can post big earnings gains with much lower interest rates. Now, that may sound strange to you. Obviously, the real world makes no distinction between a company that does well all the time and one that does extremely well some of the time.
However, in the crazy world of the stock market, we only have so much cash to go around, and right now, it’s flowing into companies that would have been doomed in a world where the Fed didn’t start cutting rates. These companies have stocks that are much prized right now, so the money funnels into them. Everything else went up but couldn’t stay up after the rate cut. These did stay up; unfortunately, there aren’t enough of them to allow the averages to close in the black. That’s why we close in the red.”
Cramer questions whether all tech stocks are now weaker and suggests that not every company will suffer the same fate. He believes there are still standout stocks in the tech sector that can thrive regardless of economic conditions, even if they don’t perform well on days when the market dips. These companies help larger businesses operate more efficiently, and there’s always a demand for that kind of support, indicating that some tech players will continue to shine.
“So, is every player doomed to the same small part? Are the stocks of all tech companies weaker now? Can nothing transcend that status? Like when I went out for Bye Bye Birdie or Guys and Dolls in high school, I mean, first, no publicly traded company would ever be that low. I was totally expendable, other than as Lieutenant Rooney in ARS Gold Lace, where I don’t think I ever spoke more than a few words.
But there will be stocks that shine even in tech with rates coming down. However, we come out here to find legitimate stars that can thrive regardless of the economy, and they don’t do that well on days like today. Many of these outfits are about helping big companies do more with less, and there’s always demand for that. They’re not big players; you bring in these guys to bridge the gap and perform better with fewer people.”
Jim Cramer: Artificial Intelligence (AI) Drives Profit Growth Despite Slowing Sales
Jim Cramer also highlights that artificial intelligence is a crucial factor in today’s market. Companies using AI can enhance their profit margins, increasing earnings even amid declining sales. This indicates that AI can drive profitability without needing to boost sales.
Our Methodology
This article summarizes Jim Cramer’s latest Mad Money episode, in which he analyzed several stocks. We selected 12 companies and ranked them by their ownership levels among hedge funds, beginning with those that are least owned and moving to those that are most owned.
At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A group of finance professionals analyzing market trends on their computer screens.
Workday Inc. (NYSE:WDAY)
Number of Hedge Fund Investors: 86
Jim Cramer noted that the Federal Reserve recently reduced interest rates by 50 basis points. He explained that while this move could benefit businesses, it won’t automatically guarantee success for Workday. Instead, he believes Workday’s ability to innovate and outsmart its competitors will be the key to its growth.
“Right now, the Federal Reserve has just cut rates by 50 basis points. While this can help businesses, it won’t necessarily drive Workday’s success. Workday will thrive by being innovative and smarter than competitors.”
Workday Inc. (NYSE:WDAY) has a positive outlook, supported by strong Q2 2024 earnings that exceeded analysts’ expectations for both revenue and earnings per share. This reflects the increasing demand for its cloud-based HR and financial management solutions. As businesses accelerate their digital transformation, Workday Inc. (NYSE:WDAY) is well-positioned to gain market share, particularly with the growing need for integrated, cloud-based solutions in hybrid work environments.
Workday Inc. (NYSE:WDAY) continues to innovate, enhancing its Human Capital Management and Financial Management platforms with new AI-driven features that improve customer satisfaction. Strategic partnerships with leading technology firms further enhance its offerings, making Workday Inc. (NYSE:WDAY) an attractive choice for companies seeking operational efficiency.
Additionally, strong customer retention rates, successful upselling to existing clients, and new acquisitions in the mid-market segment contribute to its growth potential. Recent announcements about strategic acquisitions and partnerships aimed at boosting AI capabilities have also generated positive sentiment about Workday Inc. (NYSE:WDAY) ‘s future prospect.
Baron Technology Fund stated the following regarding Workday, Inc. (NASDAQ:WDAY) in its Q2 2024 investor letter:
“Workday, Inc. (NASDAQ:WDAY) is a leading cloud human capital and financial management software vendor. The stock detracted from performance after it reported an “in-line” subscription revenue quarter, which marked the second quarter in a row of weaker-than-expected bookings growth (quarter-over-quarter change in 12-month current revenue performance obligations + subscription revenues), with bookings decelerating to 13% the fourth quarter of fiscal year 2024 and 12% in the first quarter of fiscal year 2025. Management noted it saw extended deal cycles and customers committing to lower headcount on renewals.
In our view, Workday either needs to be able to reaccelerate growth or show greater margin expansion (it is tracking about 500 basis points below its closest peers, which are delivering close to 30% adjusted operating margins vs. about 25% for Workday). Given the current headwinds around IT budgets – namely, the ability for back office digital transformation projects to sustain priority amidst AI projects that tend to focus on the front office – and the company’s tardy margin expansion, we decided to exit the remainder of the position (we had trimmed it after our visit to Workday’s headquarters in the March quarter). We will revisit the name if we gain greater conviction in either faster growth or an updated target model that incorporates more operating leverage.”
Overall WDAY ranks 4th on our list of the stocks that could change your investment game according to Jim Cramer. While we acknowledge the potential of WDAY as an investment, our conviction lies in the belief that under the radar AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than WDAY but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.