On Friday, Loop Capital updated its outlook on shares of Workday (NASDAQ:WDAY), a provider of enterprise cloud applications for finance and human resources. The firm raised its price target on the company's stock to $255 from $240, while maintaining a Hold rating. The adjustment follows Workday's recent announcement regarding its financial expectations and strategic focus shift.
Workday has indicated that while its medium-term growth potential may have reached its peak, the company is now concentrating on expanding its margins. It has set an annual subscription revenue growth target of approximately 15% for fiscal years 2026 and 2027, a reduction from its previous three-year annual growth target of 17-19%. This new projection itself was a step down from an earlier growth forecast of over 20% annually.
In exchange for slower revenue growth, Workday is aiming to accelerate its non-GAAP operating margin expansion, targeting 30% in fiscal year 2027, up from a prior goal of 25%+. This shift in strategy led to a positive response from the market, with Workday's stock price increasing by 11% in after-hours trading.
Loop Capital expressed appreciation for Workday's disciplined approach to its growth strategy in the context of decelerating growth prospects. However, the firm also noted an increased risk associated with the company's capacity to disrupt legacy financial applications in the market.
The analyst suggested that investors who were initially drawn to Workday's financial application market opportunity might exit the stock once the margin expansion potential is fully reflected in the share price.
The narrative surrounding Workday could change back to a focus on top-line growth, similar to what occurred with CRM after it demonstrated significant margin expansion a year prior. Loop Capital's revised price target is based on higher cash flow estimates for Workday.
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