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Workday stock outlook lifted by AI expansion, but Citi flags near-term risks

EditorEmilio Ghigini
Published 2024-11-27, 06:00 a/m

WDAY
2.14%

On Wednesday, Citi updated its stance on Workday (NASDAQ:WDAY) stock, increasing the price target to $287 from $270, while maintaining a Neutral rating. The adjustment follows Workday's third fiscal quarter report, which presented a modest subscription revenue beat and a downward revision for its fourth-quarter guidance. Additionally, the initial forecast for fiscal year 2026 was at the lower end of expectations, signaling a 14% year-over-year growth.

Workday's third-quarter results fell short of the firm's average fourth-quarter subscription revenue beat, coming in at a 0.1% increase compared to the average of 0.3%. The fourth-quarter guidance was lowered, partially due to the timing of some larger deals, estimated between $8 million and $10 million, which are contingent on further infrastructure investments.

Despite the initial concern this guide-down might raise, Citi noted that the revenue recognition shift into the second half of fiscal year 2026 and the growing contribution from artificial intelligence, with a 30% expansion attach rate, could indicate a stronger quarter than the headline numbers imply.

The report highlighted the company's strategic moves, including investments in Data as a Service ( DIA (BME:DIDA)) and Wellness programs, which are expected to bolster future bookings. These initiatives also demonstrate Workday's expansion into partner-driven market channels.

However, Citi's analyst expressed caution, maintaining a Neutral rating on the stock. The firm awaits greater confidence in a more stable estimate trajectory and evidence that potential risks to the business model have been mitigated before changing its rating stance.

In other recent news, Workday Inc (NASDAQ:WDAY). saw a 16% increase in its third-quarter subscription revenue, reaching $1,559 million. However, the company adjusted its fiscal year 2026 subscription growth forecast to a slightly lower 14%. Analyst firms have given mixed reactions to these developments. Guggenheim maintained a Sell rating on Workday, expressing caution on subscription growth and valuation.

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BMO (TSX:BMO) Capital and RBC (TSX:RY) Capital maintained their Outperform rating on Workday, keeping a steady price target of $300.00. Morgan Stanley (NYSE:MS) also maintained its Overweight rating, raising the stock's price target to $330 from $315.

On the other hand, Deutsche Bank (ETR:DBKGn) maintained its Hold rating and reduced the stock's price target from $275.00 to $265.00. Piper Sandler shifted from an Overweight rating to a Neutral stance, reducing their price target to $270.

Workday also announced 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. These are among the recent developments at Workday, and investors are closely monitoring the situation.

InvestingPro Insights

To complement Citi's analysis of Workday (NASDAQ:WDAY), recent data from InvestingPro provides additional context for investors. As of the last twelve months ending Q2 2025, Workday reported impressive revenue growth of 17.07%, reaching $7.86 billion. This aligns with Citi's observations on the company's subscription revenue performance and future growth projections.

InvestingPro Tips highlight Workday's strong financial position, noting that the company "holds more cash than debt on its balance sheet" and has "liquid assets exceed short term obligations." These factors could provide Workday with the financial flexibility needed to continue investments in areas like Data as a Service and Wellness programs, as mentioned in Citi's report.

Moreover, Workday's gross profit margin stands at a robust 75.77%, which InvestingPro characterizes as "impressive gross profit margins." This high profitability could support the company's ability to invest in infrastructure and AI initiatives, potentially addressing the concerns raised about the timing of larger deals.

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For investors seeking a more comprehensive analysis, InvestingPro offers 13 additional tips for Workday, providing a deeper dive into the company's financial health and market position.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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