Workday: Sets Targets for 2027 That We Think Are Too Conservative; Reiterate $245 Fair Value

Workday’s WDAY shares plummeted 7% after hours upon analyst day 2027 targets revealed today, which came in under our and the market’s expectations. However, we think that Workday is exercising substantial caution in its targets—especially when it comes to non-GAAP operating margins, as we see all the right levers to push profitability momentum ahead. In positive news, the afterhours drop brings the former 3-star stock into attractive 4-star territory—giving long-term investors a window of opportunity for exposure to this wide-moat name. We reiterate our $245 fair value estimate as well as our belief that Workday is well-positioned to benefit from the massive base of SAP and Oracle enterprise resource planning, or ERP, customers yet to migrate to cloud solutions.

At its annual analyst day, Workday outlined an annual subscription revenue growth target of 17%-19% through fiscal 2027, which we think is a light target considering the size of opportunity ahead for the firm in a market that is largely yet to move over to cloud solutions, like Workday’s. Workday stressed it has about 50% of the Fortune 500 as customers, which we think speaks to its enterprise strength—but also bodes well for ample opportunity ahead. Workday expects that 75%-80% of the financial management (FINS) market is still deployed on-premises. We think this is a reasonable estimate, as Oracle revealed last week that only about 10% of its on-premises applications support customers had fully moved to the cloud. As a result, we think annual subscription revenue growth targets can push past 20% by fiscal 2027.

With top-line targets came a fiscal 2027 non-GAAP operating margin of 25%-plus. We think the firm will be able to make it securely in the “plus” territory as we believe scale from international and in-platform expansion will prove to be a profitability lever along with internal usage of artificial intelligence and machine learning already at play, which should improve research and development spending.