Cloud Native And AI Adoption Will Open Global Markets

Key Takeaways

• Strong adoption of AI-powered products and targeted acquisitions are boosting cross-selling opportunities and supporting sustained growth and higher average contract values.
  
• Expansion into new markets and investment in global presence are increasing revenue diversity while operational efficiency initiatives are enhancing profit margins.
  
• Rapidly evolving competition and regulatory complexity threaten Workday's pricing power, growth momentum, and profitability, while heavy investments may not yield corresponding efficiency improvements.

Catalysts

Provides enterprise cloud applications in the United States and internationally.

• Workday is positioned to benefit from the accelerating demand for cloud-native and AI-powered enterprise solutions, as organizations continue replacing legacy on-premise systems and prioritize digital transformation, driving sustained subscription revenue growth and expanding backlog.
  
• Broad adoption of Workday's AI-enabled HR and finance products (with >70% of customers using Workday Illuminate and >75% of net new deals including at least one AI product), along with acquisitions like Paradox and Flowise, is fueling cross-sell/upsell activity, increasing average contract values and bolstering future topline growth.
  
• Expansion into new product lines and verticals-particularly financial management, federal government (via Workday Government), and medium/enterprise segments with offerings like Workday GO-is increasing the company's total addressable market, supporting elevated growth in revenue and multi-year backlog.
  
• Investments in global footprint (notably UK, Germany, Japan, and now India with local data centers and leadership) are unlocking new revenue pools while providing geographic diversification that can help stabilize and grow overall revenue.
  
• Continued focus on operational efficiency, ecosystem and marketplace development (Workday Extend, partner-driven ACV >20%), and scalable AI infrastructure is enabling operating leverage and margin expansion, driving long-term improvement in non-GAAP operating margin and free cash flow.

Workday Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Workday's revenue will grow by 13.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.5% today to 14.3% in 3 years time.
• Analysts expect earnings to reach $1.8 billion (and earnings per share of $6.42) by about September 2028, up from $583.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $2.1 billion in earnings, and the most bearish expecting $1.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 52.9x on those 2028 earnings, down from 105.7x today. This future PE is greater than the current PE for the US Software industry at 36.2x.
• Analysts expect the number of shares outstanding to grow by 0.75% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.57%, as per the Simply Wall St company report.

Workday Future Earnings Per Share Growth

Risks

• The emergence of highly capable AI-powered HCM and ERP start-ups, enabled by rapid innovation in generative AI and "fast fashion SaaS," increases the risk of commoditization, weakening Workday's pricing power and potentially leading to customer churn and revenue pressure over the long term.
  
• Heightened regulatory and data privacy requirements, especially in sectors like government and healthcare, may increase compliance costs and operational complexity as Workday expands; this could compress net margins and slow the pace of innovation.
  
• Sustained high levels of R&D, M&A spending (e.g., Paradox, Flowise) and near-term operating investments needed to maintain competitiveness in AI, platform extensibility, and regional expansion may not deliver sufficient efficiency gains at scale, pressuring profitability and long-term earnings.
  
• Ongoing macroeconomic uncertainty, funding constraints in key verticals (such as state/local government and higher education), and variability in early renewals could cause unpredictable demand cycles and elongate sales cycles, potentially impacting revenue predictability and growth.
  
• Intensifying competition in core international markets (Europe, Japan, India) from established incumbents (SAP, Oracle) and new disruptive SaaS entrants may slow Workday's international market share gains, affecting topline revenue growth and long-term backlog expansion.

Valuation

• The analysts have a consensus price target of $279.048 for Workday based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $340.0, and the most bearish reporting a price target of just $220.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $12.9 billion, earnings will come to $1.8 billion, and it would be trading on a PE ratio of 52.9x, assuming you use a discount rate of 8.6%.
• Given the current share price of $230.73, the analyst price target of $279.05 is 17.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.