On Wednesday, RBC (TSX:RY) Capital maintained its Outperform rating on Workday (NASDAQ:WDAY) stock with a steady price target of $300.00, following the company's mixed third-quarter earnings report. The report indicated that Workday's shares fell by 10% in after-hours trading.
The quarter's performance was largely driven by services revenue, with a slight uptick in full-year margins. However, the company faced delays in a few deal start times, prompting a reduction in the full-year subscription guidance.
Workday's early fiscal year 2026 margin outlook was positive, surpassing consensus expectations. Despite this, the forecast for FY26 subscription growth was set at approximately 14%, which is lower for the first quarter, marking a disappointing development after a recent revision of growth targets. RBC Capital's analyst noted that the near-term headwinds appear to be primarily noise and that the long-term thesis for the company remains unchanged.
The company's Q3 results showcased an outperformance predominantly due to services revenue, but the delayed deal start times have led to a lowered expectation for full-year subscription revenue. The slight increase in full-year margins and the early FY26 margin view provided some positive news amidst the less favorable subscription growth forecast.
Workday's report has generated a mixed response, with the lowered subscription guidance for the full year being a point of concern for investors and stakeholders. The company's shares experienced a notable decline in after-hours trading following the earnings release.
In summary, RBC Capital has reaffirmed its positive outlook on Workday, emphasizing that the long-term prospects for the company are solid. Despite the mixed Q3 results and the subsequent drop in share price, RBC Capital advises that the current challenges are temporary and do not detract from the company's long-term potential.
In other recent news, Workday Inc (NASDAQ:WDAY). saw a 16% rise in subscription revenue to $1,559 million in the third quarter of fiscal 2025, attributed to a focus on artificial intelligence (AI) innovation, strategic partnerships, and market expansion. Total (EPA:TTEF) revenue also increased by 16% to reach $2,160 million, maintaining a non-GAAP operating margin of 26.3%. Additionally, the company reported a 15% increase in the 12-month subscription revenue backlog, reaching $6,980 million.
However, Piper Sandler adjusted its stance on Workday, moving from an Overweight rating to a Neutral position, and revised its price target downward to $270 from the previous $285. The firm expressed concerns about Workday's growth prospects, citing the expected decline in calculated remaining performance obligations (cRPO) growth for the fifth consecutive quarter.
Workday's valuation multiple was also deemed challenging to justify in comparison to growth at a reasonable price (GARP) peers, despite the potential for margin expansion to 27.5% in fiscal 2026, which could support over 15% growth in earnings per share. The firm reduced its forecast for fiscal year 2026 growth to 12.5% from an earlier estimate of 14%.
In light of these developments, Workday anticipates a subscription revenue of approximately $8.8 billion for FY 2026. The company recently underwent leadership changes, with Doug Robinson set to retire at the end of the fiscal year, and Rob Enslin joining as President and Chief Commercial Officer.
InvestingPro Insights
Workday's recent financial performance and market position can be further illuminated by several key metrics from InvestingPro. The company boasts a substantial market capitalization of $71.3 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 underscores its efficiency in core operations, aligning with the InvestingPro Tip highlighting "impressive gross profit margins."
Despite the recent challenges noted in the earnings report, Workday has demonstrated strong financial health. The company "holds more cash than debt on its balance sheet," according to an InvestingPro Tip, which provides a buffer against the near-term headwinds mentioned in the article. Additionally, Workday's revenue growth of 17.07% over the last twelve months indicates ongoing expansion, even as the company navigates deal delays and adjusts its subscription growth forecast.
Investors should note that Workday is "trading at a high earnings multiple" with a P/E ratio of 46.28, suggesting that the market maintains high expectations for future growth despite the recent setbacks. This valuation metric, combined with the company's strong return of 13.66% over the last month, indicates that investors may be looking past the short-term challenges highlighted in the earnings report.
For those seeking a more comprehensive analysis, InvestingPro offers 13 additional tips on Workday, providing deeper insights into the company's financial position and market performance.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.