Workday stock performance snapshot

Workday (WDAY) has been under pressure recently, with the share price down about 2% over the past week and roughly 41% over the past 3 months, while year-to-date returns sit near 38% lower.

At a share price of US$127.07, Workday’s recent trend points to fading momentum. The 90 day share price return is 41.4% and the 1 year total shareholder return is 49.3% lower, indicating investors have reassessed both growth prospects and risk.

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So with Workday now at US$127.07, trading at a material discount to some analyst targets and intrinsic estimates, should you see this weakness as a reset that leaves potential upside on the table, or is the market already pricing in future growth?

Most Popular Narrative: 49.8% Undervalued

Against the last close at $127.07, the leading narrative on Workday points to a fair value near $253.14, implying a wide gap between price and expectations.

This narrative is brief and simply stands on the shoulders of the recent aggregate analysts review (Dec 2024). Put simply, if revenue grows at <15% per annum and margins fall to an average of <20% over the next 3 years, that implies a fairly consistent growth rate that contradicts the high price-to-earnings (PE) ratio for this stock. A reasonable investor is not going to pay a 50+ PE (for 2% returns on the current price) for a company with proven growth below 15%. In addition, with the risk factors in play, especially AI, the discount rate used by any investor should be higher to justify the returns. Thus, even allowing for revenue growth at 15% and margins at 20%, with the discount rate holding at 7.08%, if PE acceptance falls to 30x then the indicated fair value is $253.14. That still implies higher future growth than would have been demonstrated for 5 to 7 years up to that point.

Curious how a higher discount rate, firmer margin assumptions, and a lower future earnings multiple can still support a much higher fair value? The tension between slower growth assumptions and a strong valuation call is exactly what shapes this narrative.

Result: Fair Value of $253.14 (UNDERVALUED)

However, this hinges on assumptions that could easily break, such as revenue holding near 15% growth, margins near 20%, and market comfort with a 30x future P/E.

Another view using earnings multiples

The narrative points to a fair value of $253.14, but the current P/E of 47.1x is well above the US Software industry at 27.8x, the peer average at 29.3x, and even our fair ratio of 37.2x. That gap raises a simple question: is this a mispricing or just higher risk?

Next Steps

After all this, do you think the market is being too harsh or just realistic about Workday’s prospects? Take a closer look at what the positive signals are telling you through 3 key rewards

Looking for more investment ideas?

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.