Workday, Inc. (NASDAQ: WDAY) is another cloud stock proving its utility to consumers and value to investors. The Q3 results highlight the company’s leadership position in two of AI's most active (commercially) areas today: financial services and HRM automation. Among the myriad applications for AI, these are the most useful to the broadest range of businesses today, and Workday is capitalizing on them.
The company has included AI at the core of its platforms from the start and has made several updates this year. Among them is the launch of Workday’s AI Marketplace, a tool that helps all types of consumers connect with the AI applications that best suit their needs.
"The momentum across our business is palpable, powered by our AI innovation, strength in full platform deals, expanding partner ecosystem, and international growth,” said Carl Eschenbach, co-CEO of Workday.
Workday beats and raises, margins are impressive
Workday had a solid quarter with revenue of $1.87 billion, growing nearly 17% YOY. The revenue surpassed the Marketbeat.com consensus estimate by a slim 100 basis points and is compounded by a widening margin. Revenue growth is underpinned by subscription strength, up 18%, supported by a robust and growing subscription backlog. The subscription backlog is up nearly 31%, with strength across all business sizes and subscription lengths. Long-term 24-month and 12-month subscription growth are both up 22%.
The margin news is more impressive. The company produced positive GAAP operating income versus a loss last year and widened its adjusted margin by 510 basis points to 24.8%. This led to GAAP earnings of $0.43 compared to the $0.29 loss posted last year, and adjusted earnings were well above target. The adjusted $1.53 is up more than 100% YOY, outpaced consensus by 850 basis points, and led management to raise guidance.
The guidance is another reason to expect new highs soon. The company increased its subscription growth and margin outlook to above the analysts' consensus and may be cautious.
Analysts praise results; execution is on track
The analysts are happy with what they see in the Workday results and are raising their price targets because of it. At least three significant firms, including Mizuho and Barclays, have come out to reiterate a Buy/Strong Buy rating and raise their price targets. The new targets range from $260 to $290 and are above the broad consensus reported by Marketbeat. The consensus is trending higher in 2023 and continuing that trend in Q4. A move up to the consensus would be a slight loss compared to the post-release price action, but the freshest targets imply a mid-single-digit to low-double-digit increase in share prices.
Takeaways from the analysts' chatter are centered on execution. The group sees execution driving results as much as demand. Cross-selling of services helps improve the growth outlook by providing leverage with existing and new clients. Ultimately, the story is that this company is back on track and expected to solidify its leadership position in back-office SaaS.
The technical outlook: Workday moves to a new high
The post-release action has the stock up 10%, forming a large gap on the daily and weekly charts. The new high suggests more new highs are coming, but there may be corrective action in the interim. A move down to close the gap is not expected but would be a welcome entry point. It is more likely that support will be found near $250 and the September high if a pullback were to form. If not, this stock could continue to move higher until hitting the next critical resistance point near $280.
