Why Shares of Workiva Slumped Today

What happened

Shares of Workiva (NYSE: WK) dropped on Tuesday after the software-as-a-service provider received an analyst downgrade. The stock was down about 7.5% at 11:45 a.m. EDT on Tuesday, after being down as much as 16.4% earlier in the day.

So what

Workiva was downgraded by Morgan Stanley on Tuesday. The investment bank lowered its rating on the stock from equal weight to underweight. The price target was raised to $28 from $20 along with that downgrade, but that's still well below the current $35 stock price.

Morgan Stanley analyst Stan Zlotsky said the company could be on the path to breakeven on an operating basis, with management focusing on margins based on recent fieldwork. But Zlotsky believes that the valuation already reflects any potential acceleration in revenue growth.

Now what

Workiva is certainly an expensive stock. Analysts are expecting about $241 million of revenue in 2018, putting the price-to-sales ratio prior to Tuesday's slump at roughly 7. That estimate assumes revenue growth of just about 16% from 2017, not particularly impressive given the sky-high sales multiple. And Workiva is far from profitable, posting a net loss of $60 million over the trailing 12-month period.

Zlotsky is right to be concerned about the valuation. Workiva will need to grow faster from here to justify the stock price.

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Timothy Green has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.