On Tuesday, Scotiabank (TSX:BNS) initiated coverage on Workday (NASDAQ:WDAY) shares with a Sector Outperform rating, accompanied by a price target of $340.00. The new price target suggests a 23% upside from the current level, based on a 28x calendar year 2026 estimated enterprise value to free cash flow (EV/FCF) multiple.
The firm's analysis follows Workday's September 2024 analyst day, where the company's management team presented its growth strategies, achievements over the past year, and future plans. Despite a 6% decline in Workday's share price, which indicates investor skepticism regarding the company's ability to achieve a 15% growth in subscription revenue over the next two years, Scotiabank remains optimistic.
Scotiabank pointed out that Workday's current remaining performance obligation (cRPO) has been under pressure this year, which they attribute to an unusually high number of early renewals the previous year. Adjusted for this factor, cRPO growth was approximately 17.5% in the most recent quarter.
The firm also addressed concerns about Workday's revenue guidance, acknowledging that while some investors doubt the company's ability to reach consensus expectations of 15% growth in subscription revenue next year, Scotiabank is confident in Workday's potential to meet this target over the following two years.
In addition to its financial prospects, Scotiabank considers Workday to be one of the most resilient names in its sector regarding the potential disruption from artificial intelligence (AI) technology. The current valuation of Workday's shares, trading at 23 times the estimated EV/FCF for the calendar year 2026, is viewed by the firm as an attractive entry point for investors.
In other recent news, Workday reported a 17% rise in subscription revenue, reaching $1.903 billion, and adjusted its revenue growth forecast to 15%. Loop Capital upgraded Workday's stock target to $270, maintaining a hold rating, while Goldman Sachs (NYSE:GS) increased its price target from $300 to $305, keeping a Buy rating.
In addition, TD Cowen and Oppenheimer also reiterated their positive ratings. These changes are based on expectations of Workday's continued growth and the company's ambitious financial targets for fiscal 2027, which include a 34% operating cash flow margin and a 30% free cash flow margin.
In terms of company developments, Workday announced the acquisition of Evisort, an AI-powered contract management platform, and launched four new AI agents aimed at enhancing productivity. Workday Ventures, the company's strategic capital arm, also invested in 10 new AI companies.
In leadership changes, Co-President Doug Robinson will retire in 2025 after a 14-year tenure, with Rhonda J. Morris, Chevron Corporation (NYSE:CVX)'s vice president and chief human resources officer, joining Workday's Board of Directors in early 2025. These are among the recent developments at Workday.
InvestingPro Insights
Workday's financial metrics and market position align well with Scotiabank's optimistic outlook. According to InvestingPro data, Workday boasts a market capitalization of $68.45 billion and impressive revenue growth of 17.07% over the last twelve months. This growth rate supports Scotiabank's confidence in Workday's ability to achieve its targeted 15% subscription revenue growth.
InvestingPro Tips highlight Workday's strong financial position, noting that the company "holds more cash than debt on its balance sheet" and has "liquid assets exceed short term obligations." These factors contribute to the company's financial stability and ability to invest in growth initiatives.
The company's gross profit margin of 75.77% is particularly noteworthy, with InvestingPro Tips describing it as "impressive gross profit margins." This high profitability gives Workday significant flexibility to invest in innovation and market expansion, potentially supporting its resilience against AI disruption as mentioned in Scotiabank's analysis.
While Workday is trading at "a high earnings multiple" according to InvestingPro Tips, with a P/E ratio of 44.19, this valuation may be justified by the company's strong market position and growth prospects. Scotiabank's price target of $340 suggests significant upside potential, aligning with the InvestingPro Fair Value estimate of $280.23.
For investors seeking more comprehensive insights, InvestingPro offers 11 additional tips on Workday, providing a deeper understanding of the company's financial health and market position.
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