Navigating Future Horizons, Tactical Wins And Global Expansion Promise Bright Revenue Prospects

Key Takeaways

• Workday's expansion into new markets and sectors, like the federal government, signals potential for significant revenue growth.
  
• Investment in AI and targeted offerings in verticals such as healthcare showcases Workday's innovation and strategy for enhancing product value and profitability.
  
• The company faces challenges in revenue growth due to increased deal scrutiny, regional vulnerabilities, potential revenue concentration risks, and uncertainties in AI adoption and monetization.

Catalysts

Provides enterprise cloud applications in the United States and internationally.

• Workday's strategic focus on expanding its total addressable market through go-to-market changes highlights its potential for revenue growth from broader market penetration.
  
• The company's landmark federal win at the Defense Intelligence Agency indicates a significant opportunity for future growth in the federal government sector, expected to impact future revenue positively.
  
• Investment in AI and the development of over 50 AI use cases and 25 generative AI projects on their roadmap demonstrate Workday's commitment to innovation, which is likely to enhance product offerings and customer value, positively impacting revenue and net margins.
  
• Workday's emphasis on deepening purpose-built offerings in key verticals like healthcare, public sector, and financial services, and the success marked by new ACV growth exceeding 50% in Q1 in the healthcare sector, highlights the potential for revenue growth through industry-specific solutions.
  
• Global expansion efforts, including investments in U.K. operations and the extension of regional business capabilities, signal potential for international revenue growth, enhancing Workday's in-market presence and customer base globally.

Assumptions

• Analysts are assuming Workday's revenue will grow by 14.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 19.6% today to 14.6% in 3 years time.
• Analysts expect earnings to reach $1.7 billion (and earnings per share of $5.66) by about October 2027, up from $1.5 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $726 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 55.3x on those 2027 earnings, up from 41.2x today. This future PE is greater than the current PE for the US Software industry at 38.4x.
• Analysts expect the number of shares outstanding to grow by 0.73% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.74%, as per the Simply Wall St company report.

Risks

• Increased deal scrutiny and longer sales cycles, particularly for large and net new deals in various regions, including EMEA, may lengthen the time to convert pipeline into revenue. This could impact revenue acceleration and growth projections.
  
• Lower than expected customer headcount growth at the time of renewals, observed globally, which could lead to reduced subscription revenue growth as Workday's business model is partly dependent on customer employee count.
  
• Elevated scrutiny in sales cycles and lower wins in certain international markets, especially in EMEA, indicate potential vulnerability to regional economic conditions and market dynamics that could affect international revenue contributions.
  
• Although not directly cited as a current issue, an ongoing reliance on strategic deals, such as the landmark federal win at the Defense Intelligence Agency, suggests potential revenue concentration risks. Dependency on a few large deals or sectors like healthcare and public sector for growth can impact revenue stability if sector-specific challenges arise.
  
• While Workday's investment in AI and product innovation is aimed at driving long-term growth, the pace of adoption and the ability to monetize such innovations effectively could pose risks to expected revenue streams and margins if customer adoption lags or if investments do not yield anticipated returns.

Valuation

• The analysts have a consensus price target of $288.57 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 $350.0, and the most bearish reporting a price target of just $200.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $11.7 billion, earnings will come to $1.7 billion, and it would be trading on a PE ratio of 55.3x, assuming you use a discount rate of 6.7%.
• Given the current share price of $240.66, the analyst's price target of $288.57 is 16.6% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.