WDAY stumbles on weak outlook
2min read Workday (WDAY) reported strong Q3 results, beating both EPS and revenue estimates. Adjusted EPS came in at $1.89, surpassing the consensus estimate of $1.76, and representing a 21% year-over-year increase. Revenue reached $2.16 billion, up 16% year-over-year, and slightly above the $2.13 billion estimate. Subscription revenue, a key driver, was $1.96 billion, in line with expectations, while professional services revenue outperformed at $201 million against the $174.2 million estimate.
Despite the earnings beat, guidance overshadowed the results and led to a steep decline in the stock. Workday guided Q4 subscription revenue at $2.03 billion, below Wall Street expectations of $2.195 billion. The company also issued preliminary FY26 subscription revenue growth guidance of 14%, which was below the consensus of 15%. While Workday raised its FY25 adjusted operating margin forecast to 25.5% from 25.3%, the lower-than-expected growth outlook weighed heavily on investor sentiment.
Workday’s backlog grew 20% year-over-year to $22.19 billion, exceeding estimates of $21.93 billion. This indicates a healthy pipeline of future revenue despite the near-term softness in growth rates. The company’s adjusted operating margin improved significantly to 26.3%, compared to 19.7% in the prior year and ahead of the 25.3% estimate. Product development expenses increased 4.6% year-over-year to $647 million, reflecting continued investment in innovation.
Management attributed the weaker guidance to prolonged deal scrutiny, particularly in international markets, and some revenue slippage that is now expected in FY26. While public sector opportunities and cost optimization remain bright spots, the company is facing headwinds from slower enterprise spending and global macroeconomic uncertainty. CFO Zane Rowe highlighted opportunities in the public sector but acknowledged ongoing challenges in closing deals.
Reactions from analysts were mixed but largely cautious. Piper Sandler downgraded Workday from Overweight to Neutral, lowering the price target to $270 from $285, citing waning growth prospects and tepid cRPO (current remaining performance obligation) growth. Mizuho maintained an Outperform rating with a $280 price target, noting that while the guidance was conservative, margin expansion and backlog growth set a solid foundation for FY26. UBS reduced its price target to $255 from $270, reflecting a more tempered outlook.
Workday’s valuation is becoming a point of debate among analysts. Piper highlighted concerns over the company’s CY26E P/E multiple of 28x (GAAP P/E of 70x), which appears high compared to peers like Adobe (ADBE), Salesforce (CRM), and Veeva (VEEV). The lack of a clear catalyst for accelerating growth has made analysts hesitant to recommend the stock at current levels, despite its robust margin profile and recurring revenue base.
Workday’s stock tumbled 13% in premarket trading and opened around $243, marking a year-to-date decline of 12%. Key support levels to watch are at $237, $223, and $207, while overhead resistance near $279 will be critical for any potential recovery. A bearish divergence in the RSI prior to earnings suggested weakening momentum, aligning with the post-earnings sell-off.
While Workday’s Q3 results demonstrated strong execution, with an earnings and revenue beat, the disappointing guidance and slowing cRPO growth have raised concerns about its ability to sustain long-term growth. Analysts remain divided, with some seeing value in its strong margins and backlog growth, while others are cautious about valuation and growth prospects. The stock faces technical and fundamental headwinds, with investors likely awaiting clearer signs of growth acceleration before regaining confidence.
