Morningstar

Workday: With Potential for AI Disruption, We Downgrade Moat Rating and Fair Value Estimate

We think Workday stock is fairly valued.

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Securities in This Article
Workday Inc Class A
(WDAY)

Key Morningstar Metrics for Workday

  • Fair Value Estimate
    : $150
  • Morningstar Rating
    : ★★★
  • Morningstar Economic Moat Rating
    : Narrow
  • Morningstar Uncertainty Rating
    : High

Moat Rating Update

We have lowered our economic moat rating for Workday WDAY to narrow from wide following a review of artificial intelligence’s potential disruption to the global technology sector.

Why it matters: To issue a wide moat rating, we need to believe the company can almost certainly deliver a return on invested capital above its cost of capital over the next decade. With AI’s capabilities quickly expanding, we are no longer confident about the certainty behind Workday’s wide moat.

  • Workday’s cloud-native architecture provides the best-in-class user experience among enterprise software companies. However, the platform still faces potential disruption given large language models’ capabilities to enable a brand-new natural-language-based user interaction paradigm.
  • That said, systems of record like Workday still enjoy switching costs, since AI cannot help much with the rigid one-to-one mapping of data and business logics in an enterprise system migration project. These projects still cost millions of dollars and take years, a headache for Chief Information Officers.

The bottom line: In addition to downgrading our economic moat rating to Narrow, we also reduced Workday’s fair value estimate to $150, down from $170 previously. Shares look fairly valued following our adjustments.

  • As of March 4, Workday stock was up 8% from its February low. We think its current price reflects a scenario in which Workday’s revenue continues to grow at a high-single-digit rate over the next five years, supported by its core human capital management and financial management capabilities.
  • For Workday’s stock price to return to last year’s pre-earnings level of $200 and above, we need to see the company’s AI-related revenue scale quickly and stabilize top-line growth in the low-teens range.

Between the lines: Workday already has a comprehensive AI product suite ready to go, but enterprises’ prioritization of AI-led infrastructure modernization can weigh on adoption rates for these new modules.

Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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