Workday earnings add to view that chip stocks trump software stocks now

By Emily Bary

Stock falls as analysts wonder whether recent guidance cut is the final one

After Workday Inc. lowered its subscription revenue guidance alongside its latest report, Wall Street is wondering whether this cut will be the last one.

Workday's stock (WDAY) was down 11% shortly after Friday's open.

See more: Workday's stock tumbles as 'elevated sales scrutiny' drives outlook cut

"Frankly, the [current remaining performance obligation] growth deceleration is so severe," at 20%-plus during through fiscal 2024 before going to possibly less than 15% in the second half of fiscal 2025, "that we wonder whether a modest trim to the full year [revenue] guide was enough," UBS analyst Karl Keirstead wrote in a note to clients.

Keirstead questioned whether the company "might be seeing the greater deal scrutiny more than others as a) back-office upgrades are large transformation projects, b) Workday could be running into challenges selling its [financials] suite upstream and c) Workday is more new-logo driven."

The trends at Workday contrast with those at some notable chip companies, like Nvidia Corp. (NVDA), which logged blowout numbers on Wednesday. That "may also reinforce the Semis>Software sentiment and it may cause some rotation into cloud usage-based stocks" such as Microsoft Corp. (MSFT) and Datadog Inc. (DDOG) "that are not seat-based and that are seeing some (even modest) demand improvement."

Read: Nvidia's stock surge at odds with the S&P 500 - to a degree not seen in 8 years

He rates the stock at neutral, while cutting his price target to $255 from $280.

Guggenheim's John DiFucci also showed some caution around the latest forecast.

"Although Workday guided F2Q25 subscription revenue below consensus estimates and lowered FY25 subscription guidance, we believe investors should not assume the numbers are de-risked," he wrote, as Wall Street likely did when Workday's initial fiscal 2025 outlook trailed the consensus view.

He has a sell rating and $190 target price on Workday shares.

Evercore ISI's Kirk Materne said that Workday "is likely heading to the penalty box" pending more investor ease about the fact that the guidance is "de-risked," with the potential for some upside even. Further, he said investors want to feel better about Workday's ability to improve operating margins while seeing the top-line sport a mid- to high-teens growth rate.

Still, he's bullish on the name, writing that "we don't see any reason to bail out at current levels and we think the risk/reward still skews higher." He has an outperform rating and $300 target price on the stock.

Bernstein's Mark Moerdler reiterated an upbeat view as well.

"We would encourage investors to exercise as much caution as they feel is needed," he wrote. "Overall, however, we continue to believe there is a big opportunity for Workday to drive sustain strong growth" and improve its margins.

"One could expect strong growth for a shorter period of time or slightly slower growth over a longer period of time - the long-term value is the same," he added. "As such, the weakness in the stock could be a possible entry point."

Moerdler rates the stock at outperform, though he cut his price target to $301 from $321.

-Emily Bary

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05-24-24 0937ET

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