Shares of enterprise software company Workday (WDAY) have gained momentum in recent trading sessions after investors learned that the stock would join the S&P 500 Index ($SPX) later this month. Founded in 2005, Workday is a cloud-based software vendor that went public in 2012. In the last 12 years, Workday stock has returned roughly 460% to shareholders, outpacing broader market returns of 426%.
For a company to be eligible for inclusion in the S&P 500, it must show a profit in the most recent quarter. It also has to report a profit for four consecutive quarters. In its most recent quarter, Workday reported revenue of $2.16 billion, an increase of 16% year-over-year, while net income stood at $193 million.
Valued at a market capitalization of over $70 billion, Workday – alongside Apollo Global (APO) – will replace Amentum Holdings (AMTM) and Qorvo (QRVO) starting Dec. 23. Earlier this year, several other tech stocks, such as Dell (DELL), Palantir (PLTR), and Super Micro (SMCI), were included in the flagship index.
Historically, stocks have gained momentum before they are added to a popular index, as fund managers are required to rebalance portfolios to incorporate the changes. But will Workday remain a savvy choice for long-term investors?
A Strong Performance in Fiscal Q3 2025
Workday delivered another solid quarter, making significant strides in artificial intelligence. As stated earlier, fiscal Q3 sales rose by 16% to $2.16 billion, while subscription revenue stood at $1.96 billion. The company reported an operating margin of 26.3%, ending Q3 with a subscription revenue backlog of $22.19 billion, up 20%-year-over year. Its customer retention rate stood at 98%.
Workday emphasized that its professional and business services vertical became the third segment to exceed $1 billion in annual recurring revenue, joining financial services and retail/hospitality. This milestone highlights Workday’s ability to penetrate multiple sectors successfully.
Workday stated that around a third of customer expansions in Q3 involved one or more of its AI solutions. Its Recruiter Agent had its best quarter ever, with annual contract value rising 300% over the last three months. Further, the average selling price of core recruiting solutions rose by 150% when bundled with Recruiter Agent. Notably, the Workday Assistant, an AI copilot, is helping customers reduce human resource case volumes by up to 30%.
What's Next for WDAY Stock?
For the full fiscal 2025, Workday expects subscription revenue to come in at $7.7 billion, marking annual growth of 17%. It also expects its non-GAAP operating margin to come in above 25%, and the company expects that metric to surpass 30% by the end of fiscal 2027.
Workday's success in converting AI innovations into revenue growth will be crucial going forward, and the strong adoption of AI solutions in Q3 suggests that the company is on the right track.
With only 25% of revenue coming from outside the U.S., international markets represent a significant growth opportunity for the company. Workday has already secured major wins in the United Kingdom, France, and Germany during the most recent quarter. Further, Workday's partner network has grown 5x in 18 months and contributed over 10% of new business in Q3, which suggests it is armed with a scalable growth engine.
Analysts tracking Workday stock expect sales to rise from $7.26 billion in fiscal 2024 to nearly $11 billion in 2027. Comparatively, adjusted earnings are forecast to expand from $5.84 in 2024 to $10.13 in 2027, while free cash flow is estimated to surpass $3 billion. Priced at 38x trailing earnings, WDAY stock trades at a reasonable valuation, given its growth estimates.
Out of the 35 analysts covering WDAY stock, 23 recommend “Strong Buy,” two recommend “Moderate Buy,” nine recommend “Hold,” and one recommends “Strong Sell.” The average target price for the tech stock is $288.27, indicating upside potential of 3% from current levels.
The Key Takeaway on Workday Stock
Workday continues to execute well on its core business while successfully integrating AI capabilities across its platform. Further, maintaining high customer retention rates while expanding margins demonstrates the strength of its business model. With clear targets for growth and profitability through FY27, Workday appears well-positioned to capitalize on the enterprise digital transformation trend.
The key risk to watch is the slower growth projection for FY26 (14% versus 16% currently), although these estimates could prove conservative if AI-related offerings continue their strong momentum.
On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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