Workday Earnings: Risky Bets In AI Are Questionable for Accelerated Revenue Growth

Key Morningstar Metrics for Workday

• Fair Value Estimate: $170.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Workday’s Earnings

Workday WDAY delivered solid fourth-quarter revenue growth of 15% and non-GAAP operating margin of 31%. However, fiscal 2027 subscription revenue guidance of 13% and non-GAAP operating margin guidance of 30% both undershot investor expectations, triggering a 9% after-hours selloff.

Why it matters: Workday is taking a risk by doubling down on artificial intelligence investments that can alter its consistent margin expansion. We believe establishing a successful sales motion to upsell agentic AI products can be a real challenge amid a volatile enterprise IT spending environment.

• Our estimated fiscal 2027 non-GAAP operating margin expansion of 60 basis points is well below the three-year trailing average annual expansion of 340 basis points. We model a 70-basis-point expansion in fiscal 2028 to 31%, meaning Workday is likely to miss its 35% midterm margin target.
• Workday’s current annual AI revenue stands at $400 million, or 5% of subscription revenue. We think the timeline for AI-based products to accelerate company-wide revenue growth is highly uncertain, especially given the lack of clarity around the go-to-market strategy.

The bottom line: We cut our fair value estimate for wide-moat Workday to $170 per share from $300. We doubt Workday’s AI solutions can find buyers anytime soon and therefore removed all AI-related revenue tailwind from our base-case forecast. Despite the fair value change, shares remain undervalued.

• Higher AI-related development and sales spending can compress Workday’s margin improvement. Our updated fiscal 2030 operating margin estimate of 18% is 360 basis points lower than our previous forecast, highlighting the pressure Workday may face against competing AI products.
• We think customer interest in Workday’s core HR and financial management offerings should continue to deliver stable long-term growth. The high complexity and demanding reliability and security requirements should protect these systems from potential AI disruption.