Setting the scene for Workday

Workday (WDAY) has been under pressure recently, with the share price weaker over the past month and past 3 months. That pullback is prompting investors to reassess what they are paying for its cloud applications business.

Looking beyond the recent pullback, Workday’s share price has weakened over the past year, with a 1 year total shareholder return decline of 39.42% and longer term total shareholder returns also negative. This suggests momentum has been fading as investors reassess growth and risk around its US$9.6b cloud business.

If you want to see how other software names are trading around shifting sentiment toward cloud and AI, it may be worth scanning 67 profitable AI stocks that aren't just burning cash

With Workday now trading well below where many analysts mark its value and long term returns under pressure, the key question is simple: is this a reset that leaves upside on the table, or is the market already baking in all the growth ahead?

Most Popular Narrative: 49.6% Undervalued

Workday’s last close at $127.51 sits well below the $253.14 fair value suggested in the most followed narrative, which leans on relatively moderate growth and margin assumptions.

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% pa and margins fall to <20% average over next 3 years, that implies a pretty consistent growth rate that contradicts the high PE ratio for this stock. A reasonable investor is not going to pay 50+ PE (for 2% returns on current price) for a company with proven growth <15%. Further, 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 discount rate holding at 7.08%, if PE acceptance falls to 30x then indicated fair value is $253.14. That still implies higher future growth than would have been demonstrated for 5–7 years up that point.

Curious how a relatively modest revenue path, firm margins and a richer profit multiple can still support such a high fair value gap? The full narrative spells out the exact earnings and valuation bridge behind that $253.14 figure.

Result: Fair Value of $253.14 (UNDERVALUED)

However, this hinges on Workday defending its high P/E and discount rate assumptions, and on AI or competitive shifts not compressing that earnings multiple faster than expected.

Another view from market pricing

The narrative fair value of $253.14 paints Workday as undervalued, but the current P/E of 47.3x is far richer than the US Software industry at 30.1x, the peer average at 30.1x and even the 35.6x fair ratio that our model suggests the market could move toward. That gap points to real valuation risk if sentiment stays weak.

Next Steps

With sentiment this mixed, it helps to step back, review the numbers independently, and move quickly to shape your own stance. To see why some investors are still constructive on the story, take a closer look at the 3 key rewards.

Looking for more investment ideas?

If Workday is on your radar, do not stop here. The screener tools surface other stock ideas that could help inform your portfolio decisions.

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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.