On Friday, Evercore ISI announced a reduction in the price target for Workday (NASDAQ:WDAY), a leading provider of enterprise cloud applications for finance and human resources, adjusting the figure to $300 from the previous target of $350. Despite the decrease, the firm maintains an Outperform rating on the stock.
The adjustment follows a slight revision to Workday's fiscal year 2025 subscription revenue guidance, which has already been reflected in the stock's approximately 10% decline in after-hours trading.
Evercore ISI notes that Workday is expected to face increased scrutiny until there is greater assurance that the 17% subscription revenue growth target for FY25 is not only conservative but also has the potential for an upside. This is particularly relevant as the updated guidance suggests around 16% growth for the second half of the year.
The firm also highlights the potential for operating margins to improve provided that revenue growth stays within the mid to high teens. At the current valuation, which is around 24 times enterprise value to calendar year 2025 free cash flow (EV/CY25 FCF), the market appears to have already accounted for a mid-teens revenue growth scenario. If this level of growth is achieved, Evercore ISI believes there could be room for operating margin expansion.
Workday's current position does not warrant exiting the stock at its current levels, according to the firm. The recent revenue shortfall is attributed more to macroeconomic factors rather than competitive pressures.
The guidance now more accurately reflects the current macroeconomic environment, and the outlook on platform deals and FINS+ remains positive. Additionally, the possibility of Workday being added to the S&P 500 index continues to be a potential catalyst for the stock.
The new price target of $300 is based on approximately 31 times the projected EV/CY25 FCF, taking into account the revised expectations for subscription revenue in fiscal years 2025 and 2026.
InvestingPro Insights
Workday (NASDAQ:WDAY) appears to be navigating the challenging economic landscape with a solid financial base, as reflected in the latest data from InvestingPro. The company holds a market capitalization of $69.21 billion and maintains a price-to-earnings (P/E) ratio of 49.61, which aligns closely with the adjusted P/E for the last twelve months as of Q4 2024 at 49.38. Despite the price target adjustment by Evercore ISI, Workday's fundamentals reveal a company with strong growth prospects, evidenced by a significant 16.78% revenue growth over the last twelve months leading to Q4 2024.
An InvestingPro Tip highlights Workday's advantage of holding more cash than debt on its balance sheet, which can provide resilience in uncertain times. Additionally, the company's liquid assets surpass short-term obligations, further underscoring its financial stability. With an impressive gross profit margin of 75.6%, Workday demonstrates its ability to maintain profitability efficiently. It's worth noting that InvestingPro offers 12 more tips on Workday, which can be accessed for a deeper analysis of the company's financial health and market performance.
Investors keeping an eye on valuation multiples will note that Workday's price-to-book ratio stands at 8.56, which may indicate a premium market valuation. However, with analysts predicting profitability this year and a solid gross profit of $5488M USD, Workday's financials suggest that the company is maintaining its competitive edge within the software industry. For those interested in gaining comprehensive insights and additional tips on Workday, consider exploring InvestingPro, and use the coupon code PRONEWS24 to receive an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
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