On Wednesday, Evercore ISI sustained its optimistic stance on Workday (NASDAQ:WDAY), maintaining an Outperform rating and a price target of $310.00. The firm's analysis suggests that Workday's operating margin "pivot" is now fully realized, and the focus shifts to the company's upcoming third-quarter results, fourth-quarter guidance, and initial outlook for fiscal year 2026 (FY26). The firm anticipates that a solid performance in these areas will be crucial for supporting the bullish case for Workday.
The current market expectations are for a 15% growth in subscription revenue, which some may argue is not conservative enough considering the current trends in calculated remaining performance obligations (CRPO). However, Evercore ISI highlights the projected free cash flow (FCF) generation through FY27, which is expected to grow at a compound annual growth rate (CAGR) of approximately 25%.
This is seen as a significant factor for investors, particularly given Workday's current valuation, which is around 21 times its enterprise value to FY26 free cash flow (EV/CY26 FCF).
Evercore ISI's discussions with Workday's partners have revealed mixed sentiments. While the macroeconomic environment in the U.S. seems to be improving, and there is strong momentum in Middle Enterprise platform deals and potential in international markets, there are also concerns.
The saturation at the higher end of the Human Capital Management (HCM) market, uncertain demand for Financial Management Solutions (FINS), and unclear AI narrative are among the challenges noted.
In conclusion, Evercore ISI anticipates a modest outperformance in Workday's third-quarter results, which could positively influence the guidance for FY26, while expectations for the fourth-quarter guidance remain largely unchanged. The firm's estimates for the third quarter include subscription revenue of $1.955 billion, marking an increase of 15.5%, and CRPO growth of 14.5%.
For the fourth quarter, the guidance is expected to align with current estimates of approximately $2.04 billion in subscription revenue and CRPO growth in the range of 14%-14.5%. This outlook takes into account the impact of early renewals, which has been affecting year-over-year growth despite a relatively easier quarter-over-quarter comparison.
In other recent news, Workday has been the subject of several analyst reports. Scotiabank (TSX:BNS) initiated coverage on Workday shares with a Sector Outperform rating and a price target of $340.00, suggesting a 23% upside from the current level. This follows Workday's analyst day, where the company presented its growth strategies and future plans.
Loop Capital also adjusted its stock price target for Workday to $270, maintaining a hold rating. TD Cowen reiterated a Buy rating with a price target of $290.00, following a meeting with Workday executives. Oppenheimer maintained its Outperform rating and a $300.00 price target.
Workday recently reported a 17% rise in subscription revenue, reaching $1.903 billion, and adjusted its revenue growth forecast to 15%. The company also set ambitious financial targets for fiscal 2027, including a 34% operating cash flow margin and a 30% free cash flow margin.
In terms of company developments, Workday announced the acquisition of Evisort, an AI-powered contract management platform, and launched four new AI agents aimed at enhancing productivity. Workday Ventures, the company's strategic capital arm, also invested in 10 new AI companies.
In leadership changes, Co-President Doug Robinson will retire in 2025 after a 14-year tenure, with Rhonda J. Morris, Chevron Corporation (NYSE:CVX)'s vice president and chief human resources officer, joining Workday's Board of Directors in early 2025.
InvestingPro Insights
To complement Evercore ISI's analysis, recent data from InvestingPro provides additional context for Workday's financial position. The company's market capitalization stands at $68.59 billion, reflecting its significant presence in the software industry. Workday's impressive gross profit margin of 75.77% for the last twelve months as of Q2 2025 aligns with the InvestingPro Tip highlighting its "impressive gross profit margins." This robust profitability metric supports the company's ability to invest in growth and innovation, which is crucial for maintaining its competitive edge in the HCM and FINS markets.
InvestingPro Tips also indicate that Workday "holds more cash than debt on its balance sheet" and that its "liquid assets exceed short-term obligations." These factors contribute to the company's financial stability, which is particularly important given the mixed sentiments from partners and the challenges noted in Evercore ISI's report.
The P/E ratio of 44.38 suggests that Workday is trading at a high earnings multiple, which is consistent with the InvestingPro Tip stating it is "trading at a high earnings multiple." This valuation metric underscores the importance of the company meeting or exceeding growth expectations to justify its current market price.
For investors seeking a more comprehensive analysis, InvestingPro offers 12 additional tips for Workday, providing a deeper understanding of the company's financial health and market position.
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