Workday follows Salesforce's lead - and it could spur the stock's best day since 2022

By Emily Bary

Workday is pivoting more toward profitability during a tougher growth period for back-office software

Workday Inc. is making a "well-timed pivot" toward profitability in the view of one analyst, and that's resonating strongly on Wall Street.

The finance and human-resources software company (WDAY) now models an adjusted operating margin of about 30% by fiscal 2027, which compares with its prior outlook for more than 25%.

The shift is "an important step in terms of opening up [Workday's] addressable investor audience" and seems to parallel a move made by Salesforce Inc. (CRM) several quarters back, according to Evercore ISI analyst Kirk Materne. Materne has an outperform rating on Workday's stock and boosted his price target to $310, from $290, after Thursday's earnings report.

See more: Why Workday's stock reversed its dip and is now soaring after earnings

Workday shares were up 11.7% in afternoon trading Friday and rallying toward their best single-day percentage increase since Nov. 30, 2022, when they rose 17.2%, according to Dow Jones Market Data.

Deutsche Bank analyst Brad Zelnick titled his note to clients on the company: "Oh what a difference the margin makes."

"The increased 30% operating-margin target was the big upside surprise as it is now committed both sooner and greater than most were expecting especially given prior commitment to investing in growth opportunities," he wrote.

Zelnick noted budgetary pressure in the market for back-office software, though he said Workday reset revenue expectations with its latest report. "Updated guidance likely clears the decks from an expectations standpoint," he wrote.

He rates the stock a hold with a $275 target price.

Bernstein's Mark Moerdler commented that the heightened margin focus should also help Workday's free cash flow, thus giving the company flexibility to invest in crucial areas.

"In our view, the stock, which has been sidelined by investors for a while. is now very well positioned with limited downside risks and sustained revenue, margins and [free-cash-flow] growth," he wrote. "We have liked the stock, and now we believe the setup is good for investors to find their entry point."

He has an outperform rating and $310 target price on Workday shares, up from $301 before.

BofA Global Research analyst Brad Sills wrote that while the strategic shift could make investors wonder whether Workday was "pivoting too much to margin" at the expense of growth opportunities, he thought the company would continue to perform well.

"We understand these risks," Sills said. "However, we note that [human-capital management] and financials are well-established categories that do not require a rapid pace of innovation in order to take share over time. Steady share gains are still possible with a lower level of investment and a product roadmap more targeted to strategic features such as AI."

-Emily Bary

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08-23-24 1353ET

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