On Wednesday, Goldman Sachs (NYSE:GS) adjusted its price target for Workday (NASDAQ:WDAY), a leading provider of enterprise cloud applications for finance and human resources, reducing it to $300 from the previous $305 while sustaining a Buy rating on the stock.
The adjustment comes after Workday revised its fiscal year 2025 subscription revenue guidance slightly downward from 16.8% to 16.7% and its fiscal year 2026 guidance from 15% to 14.3%. Despite a modest quarterly performance that exceeded expectations and a 15.4% growth in calculated remaining performance obligations (cRPO), the stock experienced a 10% decline in after-hours trading.
The revision in guidance and the subsequent investor reaction reflect concerns about the potential for incremental weakness in Workday's business. The company's fourth-quarter growth forecast has been reduced by approximately 70 basis points due to delayed revenue recognition from large deals, and the first quarter of fiscal year 2025 is expected to see compression due to comparisons with a leap year.
Goldman Sachs remains optimistic about Workday's prospects, citing several factors that could support the stock's performance. The firm anticipates a more favorable macroeconomic environment following recent election results and clarity on interest rate cuts, which could benefit Workday in fiscal year 2026.
Additionally, Workday's artificial intelligence (AI) products are gaining traction, with 30% of customer expansions in the third quarter including at least one AI solution. Notable efficiencies have been reported by customers using these AI solutions, such as a 39% reduction in turnover for Talent Optimization customers and a significant increase in core selling price from the Recruiter Agent product.
Despite the unexpected delay in revenue recognition from strategic deals, Goldman Sachs notes that the delivered products and features should lead to long-term revenue benefits. The firm believes that if Workday can demonstrate stable growth and improving margins, there is potential for the stock to re-rate.
In an optimistic scenario, Goldman Sachs envisages Workday's free cash flow (FCF) could approach $3.8 billion by fiscal year 2027, drawing parallels with other companies like Autodesk (NASDAQ:ADSK) and Salesforce (NYSE:CRM) that have experienced significant FCF expansion alongside growth maturation.
Goldman Sachs' positive outlook is tempered with caution, as the firm acknowledges that its constructive view would be challenged if Workday fails to maintain its growth trajectory through fiscal year 2026.
In other recent news, Workday Inc (NASDAQ:WDAY). reported a 16% increase in third-quarter subscription revenue, reaching $1,559 million, while adjusting its fiscal year 2026 subscription growth forecast to 14%, slightly lower than previous expectations. Needham and Citi have maintained their respective Buy and Neutral ratings on the company, despite expressing caution about the company's future growth prospects. Meanwhile, Guggenheim reiterated its Sell rating, expressing concerns about subscription growth and valuation.
On a positive note, BMO Capital retained its Outperform rating, citing Workday's robust performance in key sectors and the potential for strong free cash flow growth. Morgan Stanley (NYSE:MS) also maintained its Overweight rating, raising its price target to $330. However, Deutsche Bank (ETR:DBKGn) maintained its Hold rating, reducing the price target to $265, and Piper Sandler shifted from an Overweight to a Neutral stance, lowering their price target to $270.
Workday's recent leadership changes have also been noteworthy, 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 financial metrics and market position offer additional context to Goldman Sachs' analysis. According to InvestingPro data, Workday boasts a market capitalization of $71.3 billion and a P/E ratio of 46.28, indicating that investors are willing to pay a premium for the company's growth prospects. This aligns with Goldman Sachs' optimistic outlook on Workday's potential for re-rating if it can demonstrate stable growth and improving margins.
InvestingPro Tips highlight Workday's impressive gross profit margins, which are reflected in the data showing a gross profit margin of 75.77% for the last twelve months as of Q2 2025. This strong profitability metric supports Goldman Sachs' view on the company's efficiency and potential for long-term revenue benefits from its product offerings.
Additionally, an InvestingPro Tip notes that Workday holds more cash than debt on its balance sheet, suggesting financial stability that could help the company navigate through periods of macroeconomic uncertainty and invest in growth initiatives like AI solutions, which Goldman Sachs identified as a key factor for future performance.
For investors seeking a more comprehensive analysis, InvestingPro offers 13 additional tips for Workday, providing a deeper understanding of the company's financial health and market position.
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