Workday (WDAY), the enterprise software company, saw its shares fall by 3% in Friday's trading session after leading broker KeyBanc downgraded the stock to “Sector Weight” as the firm reckons companies would spend more on enhancing other AI capabilities over HR budgets.
Jason Celino of the firm said, “We believe the timeline for more meaningful contribution remains very early and hypothesize that HR IT budgets may continue to take a back seat to more immediate AI initiatives at the Enterprise IT level.”
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About Workday
Founded in 2005, Workday develops cloud software used to manage people, money, and business operations. The company primarily sells enterprise software through recurring subscriptions, and reportedly has more than 11,500 organizations worldwide as customers, including more than 65% of the Fortune 500 that use its platform. Its customer base includes large and medium-sized businesses, government bodies, nonprofits, and educational institutions.
Valued at a market cap of about $46 billion, WDAY stock is down 11.2% on a YTD basis. So, as the stock remains under pressure, is this the time to load up on WDAY stock? Or should investors steer clear of it? Let's have a look.
www.barchart.com Consistent But Not Exceptional
Workday's numbers evoke mixed feelings. It is solid, but for a company operating in the rapidly expanding enterprise AI space, the growth is nothing exciting.
For instance, in the most recent quarter, Workday reported a beat on both revenue and earnings, but with average growth.
Total revenues went up by 12.8% from the previous year to $2.65 billion, with core subscription revenues rising by 13.9% in the same period to $2.47 billion. In terms of visibility, backlog on both the 12-month front and in total witnessed an upward movement. Twelve-month subscription backlog saw an uptick of 14.2% from the prior year to $9.03 billion, while overall subscription backlog rose by 8% to $27.40 billion.
Earnings for the quarter came in at $2.75 per share, which denoted a growth of 24.4% from the year-ago period while also coming in higher than the consensus estimate of $2.61 per share. Notably, this was the ninth consecutive quarter of earnings beats from the company. For the current quarter, the company expects subscription revenue to be $2.515 billion.
However, net cash from operating activities slid to $520 million from $616 million in the prior year, as Workday ended the quarter with a cash balance of $661 million. This was lower than its short-term debt levels of $999 million.
Meanwhile, WDAY stock is trading at undervalued levels, with forward P/E and P/CF of 17.22 and 14.05, respectively, below the sector medians of 21.01 and 19.66, respectively. The forward P/S of 4.31 is just above the sector median of 3.21.
Working With AI
KeyBanc's assertions revolved around looking at Workday as an HR management company. However, the company has certainly got more to offer. Sana is central to the case.
Workday’s October product announcements include agents for recruiting, payroll, accounting, and compliance, alongside Decision Intelligence for asking questions of live financial, workforce, and planning data. Its Agent Passport records what an agent has been tested to do and who approved it. Then, Workday Data Cloud and its developer tools give customers ways to build agents or use Workday information in other applications without simply copying sensitive records into another system. Some of these tools are available, while others remain in early access. Workday has also arranged for Sana to work inside Claude, Gemini Enterprise, Microsoft Copilot, Slack, and Teams. That distribution matters because employees may start a task outside Workday, yet still need a governed action inside it.
Notably, the company's Analyst Day also provided some clarity as to where the company currently stands, especially in terms of AI. Workday said that its AI portfolio was approaching $600 million in annual recurring revenue and about 25% of its core customer base had adopted at least one AI product, up from just over 10% a year earlier. Nearly 900 customers had purchased an agent during the preceding 12 months, producing an average revenue uplift of about 12% among those customers. That is different from the more than 5,500 customers Workday reported in August as using at least one of its own agents. Moreover, the company maintained a goal of roughly 11% subscription growth entering fiscal 2028 and adjusted margin above 33%.
However, competitors like Salesforce (CRM) and ServiceNow (NOW) are far ahead of Workday in terms of AI adoption of their products by customers. ServiceNow reported that its AI products crossed $1 billion in annual contract value by June, alongside an agent platform rooted in IT and other business workflows, while Salesforce reported more than $1.5 billion in Agentforce annual recurring revenue for the July quarter, drawing on its customer data and sales and service applications. Workday’s roughly $600 million AI portfolio figure is smaller.
That makes Workday's compulsion to grow faster even more imperative. AI-focused product lines will be the key while playing to its strengths in finance and HR.
Analyst Opinion On WDAY Stock
Considering this, analysts have assigned an overall rating of “Moderate Buy” for WDAY stock and a mean target price of $206.78. This denotes a potential upside of 8.4% from current levels. Out of 42 analysts covering the stock, 17 have a “Strong Buy” rating, two have a “Moderate Buy” rating, 21 have a “Hold” rating, and two have a “Moderate Sell” rating.
www.barchart.com On the date of publication, Pathikrit Bose did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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