Investing.com -- Rosenblatt launched coverage of Workday with a Neutral rating, noting that the company’s decelerating growth profile is offsetting its rising earnings power.
The broker set a $235 price target, flagging that the stock is already trading close to that level and that a more attractive entry point may be needed.
Workday remains the leading cloud provider for HR and finance departments, but its core U.S. human capital management (HCM) business—still 55% of revenue—has slowed as market penetration increases.
Rosenblatt analyst Robert Simmons says this business “remains a double-digit grower” yet sees “continued (modest) deceleration” in the coming years as legacy system replacements become scarcer and competitors narrow the gap.
The analyst highlights that newer growth layers have not scaled fast enough to offset this trend. Financial management and international operations continue to grow faster than core HCM but have added only limited incremental lift in recent years.
Simmons says these segments have “only added a couple of points to growth,” and channel checks have not shown a change in trajectory. He notes attempts to improve execution in Japan and India but wants to see evidence of stronger traction before underwriting a more optimistic view.
One bright spot has been the shift toward selling more products into the existing customer base. Workday now generates roughly 60% of new annual contract value from current clients, up from 20% a few years ago, reflecting well-developed cross-sell and up-sell motions.
“While this partly reflects the difficulty in growing new logos unlike before, it also reflects that Workday is successfully developing its cross and up-sell motions,” Simmons wrote. “We expect the company to continue to lean into this, which will likely include more M&A.”
Workday’s margin profile is another key support. Non-GAAP operating margins of 29% this year and implied free cash flow margins of 28% place the company among the strongest in enterprise software.
Longer term, Simmons sees operating margins potentially exceeding 40% as growth gradually slows, giving earnings power that “likely puts a floor underneath the stock price, and gives the company time and room to grow into its valuation.”
Still, with revenue growth stabilizing in the low-teens, the stock trades above peers on a revenue-multiple basis.
For now, Rosenblatt rates Workday at Neutral as it looks “for evidence that some of the company’s potential drivers of upside will be realized, or for a more compelling entry point.”
