Workday's Shares Depreciate due to Revised Estimates. Should Investors Consider Purchasing at a Discounted Price?
Workday's share price took a hit last week following the tech company's less-than-impressive fiscal 2025 Q4 guidance. The stock has dipped around 6% year-to-date, underperforming the S&P 500's strong performance in 2024.
So, the question now is: can Workday, a leader in financial and human capital management software, bounce back in 2025? Let's dive into the details of its latest results to see if this is the perfect time to cash in on the dip.
Guidance falls flat but results shine
For its fiscal Q3 ending October 31, Workday reported impressive numbers. Revenue grew by 16% to $2.16 billion, while subscription revenue increased by 16% to $1.959 billion. These figures surpassed the company's previous forecast and even surpassed analyst expectations. The firm's EPS surged 21% to $1.89, smashing the $1.76 consensus.
Interestingly, about 30% of Workday's customer expansions in the quarter came from AI solutions. The Recruiter Agent and Talent Optimization solutions saw strong momentum, highlighting the company's intelligent insights strategy.
Workday's 12-month subscription revenue backlog increased by 15% to $6.98 billion, while the total subscription revenue backlog soared by 20% to $22.19 billion. These numbers, which are an indicator of future revenue growth, are quite promising.
The firm continued to generate significant cash, with an operating cash flow of $406 million and free cash flow of $359 million. The company's balance sheet showed $7.16 billion in cash and marketable securities and $2.98 billion in debt. Workday repurchased 600,000 shares at a cost of $157 million in the quarter.
Looking ahead, the firm revised its full-year outlook for subscription revenue growth to be approximately $7.703 billion. This represents an anticipated growth of around 17%. Workday is projecting an adjusted operating margin of about 25.5%, a slight uptick from its previous forecast of 25.25%.
For its fiscal Q4, Workday expects subscription revenue of $2.025 billion, representing a 15% year-over-year increase. It projects an adjusted operating margin of 25%.
The firm attributed its guidance dip to strategic contract wins with some delayed revenue recognition due to certain deliverables coming later. This occurred for deals with the Defense Intelligence Agency and its Workday Wellness platform. The impact on Q4 guidance is estimated to be around $8 million to $10 million.
Looking ahead to fiscal 2026, the firm is anticipating growth of about 14% to $8.8 billion, with adjusted operating margins of around 27.5%. For Q1, it expects growth to be slower due to the leap year, signaling a slight reduction from its prior expectations.
Time to seize the dip?
Workday's revenue growth is gradually settling into the mid-teens growth range as its business becomes more mature. To drive results in the coming years, the tech company is focusing on AI and the government space. With the increasing importance of cloud-based solutions, Workday believes it has the opportunity to displace antiquated on-premise systems.
From a valuation standpoint, Workday is trading at a forward price-to-sales ratio of 7.2 and a forward price-to-earnings ratio of more than 31 based on analysts' fiscal 2026 estimates. Given its growth outlook, this seems like a fair valuation. The key going forward is maintaining its mid-teens revenue growth and improving its operating margins.
In conclusion, the current dip in Workday's stock could be an opportunity for investors. With its solid balance sheet, cash flow, and robust growth momentum, the company has the potential to drive strong earnings growth in the near future.
In light of Workday's impressive Q3 earnings, surpassing its own forecast and analyst expectations, some investors might be considering whether this is the ideal moment to invest in the company's shares, given the dip in its share price.
Given Workday's focus on AI solutions and its continued success in the government sector, as well as its robust balance sheet and strong cash flow, it could potentially offer attractive returns for investors looking to capitalize on the current dip.
