Leveraging AI and Global Expansion to Propel Revenue and Margin Growth

What are the underlying business or industry changes driving this perspective?

• Workday's commitment to integrating Artificial Intelligence (AI) across its offerings, including upcoming generative AI use cases and the acquisition of HiredScore for AI-powered talent orchestration, is expected to enhance product capabilities and efficiency, potentially affecting customer acquisition, retention, and revenue growth.
• Expansion into international markets is highlighted as a significant growth area, with over half of Workday's addressable opportunity but only a quarter of its revenues currently coming from these regions, suggesting potential for substantial revenue growth.
• Investments in the Financials platform and a strategic focus on industry-specific solutions demonstrate an initiative to capture more of the market, which could lead to increased adoption in sectors like healthcare, professional services, and government, contributing to revenue growth.
• Strategic partnerships, such as the one with Insperity to power PEO services for SMB organizations, open new market opportunities and could drive customer base expansion and incremental revenue.
• Workday's focus on full platform deals (combining HCM and Financials), enabled by investments in go-to-market efforts and enhanced by new pricing and packaging strategies, is poised to drive customer acquisition and upselling, thus potentially increasing revenue and margins.

How have these above catalysts been quantified?

• Analysts are assuming Workday's revenue will grow by 16.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 19.0% today to 11.3% in 3 years time.
• Analysts expect earnings to reach $1.3 billion (and earnings per share of $5.31) by about March 2027, down from $1.4 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 67.9x on those 2027 earnings, up from 52.1x today.
• To value all of this in today’s dollars, we will use a discount rate of 6.97%, as per the Simply Wall St company report.

What could happen that would invalidate this narrative?

• The lingering effects of early-renewal dynamics could potentially introduce volatility and unpredictability into Workday’s financial forecasting and growth metrics, impacting investor confidence and share price performance.
• The company’s heavy reliance on subscription revenue growth may present risks if customer acquisition or retention falter due to increased competition or market saturation, potentially affecting overall revenue growth.
• Although Workday is investing in expanding its international market presence, the execution risks associated with scaling operations globally could impact revenue and margins if not managed effectively.
• Workday's focus on AI and the acquisition of HiredScore suggest substantial investment in innovation. However, the actual return on these investments remains uncertain. If these initiatives fail to contribute significantly to revenue growth or competitive advantage, it could negatively impact earnings.
• Margins are expected to improve, but the balance between growth and profitability could be challenged by the need to continue investing in growth areas—technology, salesforce for core Financials, and international expansion—potentially impacting net margins if growth does not meet expectations.

• The analysts have a consensus price target of $315.14 for Workday based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with this, you'd need to believe that by 2027, revenues will be $11.6 billion, earnings will come to $1.3 billion, and it would be trading on a PE ratio of 67.9x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of $272.6, the analyst's price target of $315.14 is 13.5% 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.