Workday's ROE: A Misleading Metric Amidst Declining Stock Price

Workday's (WDAY) stock has declined 8.3% over the past three months, but its financials look respectable. The company's return on equity (ROE) is 6.4%, which is lower than the industry average of 14%. However, Workday's net income growth of 63% over the past five years is higher than the industry average of 21%. The company's high earnings retention and efficient management may be contributing factors to its growth.

Workday's (WDAY) stock has experienced a notable decline of 8.3% over the past three months, a trend that has raised concerns among investors. Despite this, the company's financial performance remains respectable, with a return on equity (ROE) of 6.4%, although this is lower than the industry average of 14% [1]. However, Workday's net income growth over the past five years stands at 63%, surpassing the industry average of 21%. This impressive growth is attributed to the company's high earnings retention and efficient management.

In the second quarter of fiscal 2026, Workday reported better-than-expected financials, with subscription revenues surging by 14% year-over-year to $2.2 billion. This led to an overall top-line growth of 12.6% year-over-year to $2.35 billion, exceeding street expectations by 35 basis points. The company's cash flow from operations also increased by 7.9% year-over-year to $616 million. Furthermore, adjusted EPS surged by 26.3% year-over-year to $2.21, surpassing consensus estimates by 5.7% [2].

Workday's stock prices initially declined by 2.8% following the release of its Q2 results on August 21, 2025, but subsequently gained nearly 1% in the subsequent trading session. Analysts remain optimistic about Workday's prospects, with a consensus "Moderate Buy" rating overall. Of the 38 analysts covering the stock, 24 recommend a "Strong Buy," three recommend a "Moderate Buy," 10 recommend a "Hold," and one recommends a "Strong Sell" [1].

Looking ahead, analysts expect Workday to deliver an adjusted EPS of $8.88 for the full fiscal 2026, representing a 21.7% year-over-year increase. The company's robust earnings surprise history, with it surpassing the Street's bottom-line projections in each of the past four quarters, adds to its appeal. However, the stock's current valuation, with a mean price target of $279.68 representing a 21.8% premium to current price levels, suggests that investors may be cautious about the potential for further stock price appreciation.

In conclusion, while Workday's stock has declined over the past three months, its strong financial performance and positive analyst sentiment provide a compelling case for continued investment. The company's focus on AI-driven solutions and its expansion into new markets, particularly the government sector, positions it well for future growth.

References:
[1] https://finance.yahoo.com/news/wall-street-analysts-bullish-workday-055205885.html
[2] https://www.insidermonkey.com/blog/workday-inc-nasdaqwday-q2-2026-earnings-call-transcript-1598178/