Workday AI product adoption accelerates, but FY28 monetization remains the key test

Overview

The report evaluates Workday's 2QFY27 results, FY27 through FY28 guidance, and progress in commercializing its AI products. Goldman Sachs has become more positive on the product strategy and signs of AI adoption, but believes market performance still depends on whether AI adoption can translate into durable consumption-based revenue growth over the next 12 months, and therefore maintains its Neutral rating.

Core views

Workday's 2QFY27 financial performance was only modestly better than expected, and its after-hours share price was broadly flat. Subscription revenue was approximately 60 basis points above consensus, adjusted EBIT margin was approximately 10 basis points higher, and EPS was 5% higher, while 3Q and FY27 guidance was broadly in line with expectations. cRPO grew 14.2% year over year, but Goldman Sachs estimates that growth was only approximately 12% to 12.5% excluding acquisition impacts and slowed versus 1Q, indicating that underlying business growth has yet to show clear acceleration from AI adoption. Workday's preliminary starting point for FY28 is 11% subscription revenue growth, consistent with the growth rate in the second half of FY27, together with approximately 200 basis points of adjusted EBIT margin expansion. Goldman Sachs believes this guidance includes some initial AI contribution but does not assume large-scale commercialization; if Workday launches more products and gains a better understanding of customer usage behavior, revenue could still exceed this initial starting point. The margin expansion also indicates that the company continues to emphasize operating efficiency while maintaining revenue growth of approximately 11%. Product and pricing strategy is the main reason the report has turned incrementally positive. Workday positions AI spending as competing with enterprise labor budgets rather than merely traditional software budgets and plans to price agents based on measurable outcomes generated in individual transactions or workflows. If this logic proves valid, the revenue opportunity for AI products would derive not only from reallocating existing software budgets but also from the labor cost savings customers achieve through automation. Adoption data already shows early momentum: AI contributed more than 25% of new ACV; approximately 5,500 customers, nearly 50% of the customer base, are using at least one internally developed agent; and AI ARR reached $600 million, up $100 million quarter over quarter and tripling from the prior-year period. In addition to early progress from acquired products such as Sana and HiredScore, internally developed agents are also beginning to gain customer adoption, indicating that growth is not entirely dependent on acquired products. Specific product metrics further demonstrate usage demand. Deployment Agent has reached approximately 4,600 customers and 24,000 users, with 2Q query volume increasing 500% quarter over quarter and a long-term goal of reducing the time required for deployment tasks by 80% to 90%. Adoption Agent surpassed 200 customers within three days of launch, achieved 94% customer satisfaction, and helped customers reduce release time by 70%. These data demonstrate that the products can improve customer processes, but most internally developed agents remain in the pilot stage, and monetization and recurring consumption revenue have yet to materialize. Accordingly, the next 12 months will be a critical transition period from product adoption to commercialization. Goldman Sachs believes share price performance will depend first on whether AI adoption continues to expand, then on whether pilots convert into durable consumption-based revenue and whether agentic workflows provide incremental growth to Workday's overall growth algorithm rather than merely replacing revenue from existing products. FY28 AI monetization, as emphasized in the title, is the key validation requirement behind the report's decision to maintain a Neutral rating rather than turn more positive. Regarding forecasts, Goldman Sachs modestly adjusted its FY2027E, FY2028E, and FY2029E revenue estimates to $10,655.7 million, $11,745.5 million, and $12,848.9 million, respectively, from $10,662.1 million, $11,752.1 million, and $12,855.7 million previously. Over the same period, EPS estimates were raised to $11.12, $13.99, and $16.86 from $10.96, $13.45, and $16.68. The model projects FY2027E through FY2029E revenue growth of 11.6%, 10.2%, and 9.4%, respectively, while EBIT margin rises from 31.2% to 32.9% and 33.3%, reflecting a combination of gradually slowing revenue growth and continued profitability expansion. On valuation, Goldman Sachs raised its 12-month price target from $151 to $164, applying a 24x P/E multiple to revised GAAP Q5 through Q8 EPS while rolling forward the target valuation period and updating the share count. The forecast P/E declines from 17.4x in FY2027E to 13.8x in FY2028E and 11.5x in FY2029E. Workday has an M&A rank of 3, corresponding to a relatively low 0% to 15% probability of being acquired under Goldman Sachs' framework, so no acquisition premium is included in the price target. Despite raising the price target, the report maintains its Neutral rating.

Analysis framework

Goldman Sachs first compares actual 2Q results with FactSet consensus estimates, then excludes acquisition impacts to estimate underlying cRPO growth. It subsequently assesses the quality of AI adoption using metrics including new ACV, AI ARR, customer coverage, usage volume, customer satisfaction, and process efficiency, and uses these indicators to evaluate the AI contribution already embedded in FY28 subscription revenue and margin guidance. Finally, the report updates FY2027E through FY2029E revenue and EPS estimates and calculates the 12-month price target using revised GAAP Q5 through Q8 EPS and a 24x P/E multiple.

Methodology notes

• Event-Driven Strategy and Behavioral FinanceExpectation Gap/Expectation Management

  Comparison of results and management guidance with consensus expectations

  The report measures the incremental information conveyed by the earnings event by comparing 2Q subscription revenue, EBIT margin, and EPS with market expectations and assessing whether 3Q, FY27, and FY28 guidance is in line with expectations.

• (Out-of-Vocabulary Method)

  Normalization of cRPO growth excluding acquisition impacts

  The report adjusts the disclosed 14.2% year-over-year cRPO growth rate to approximately 12% to 12.5% to reduce the impact of acquisitions and more closely assess underlying business momentum.

• Valuation MethodPE/PEG valuation

  Target P/E valuation based on GAAP Q5 through Q8 EPS

  Goldman Sachs applies a 24x P/E multiple to revised GAAP Q5 through Q8 EPS and raises its 12-month price target from $151 to $164 after rolling forward the valuation period and updating the share count.

• (Out-of-Vocabulary Method)

  Goldman Sachs M&A ranking framework

  Workday has an M&A rank of 3, corresponding to a relatively low 0% to 15% probability of being acquired. Under this framework, such a level of acquisition potential is not considered material, so the price target contains no M&A component.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Workday Inc. (WDAY.US)

  AI agent adoption and FY28 commercialization are key future growth drivers and the primary validation points.

  Strengths

  AI ARR reached $600 million, AI contributed more than 25% of new ACV, approximately half of customers use internally developed agents, and some products have already demonstrated significant efficiency improvements and high customer satisfaction.

  Weaknesses

  cRPO growth excluding acquisitions was approximately 12% to 12.5% and slowed versus 1Q, while most internally developed agents remain in the pilot stage and the recurring monetization model has yet to be fully validated.

  Comparison

  2Q subscription revenue, adjusted EBIT margin, and EPS were all modestly above consensus expectations, but 3Q, FY27, and preliminary FY28 guidance was broadly in line with expectations.

  Risks

  The pace of market share gains, M&A execution, and AI's impact on the HCM software market.

Key data

• 2Q subscription revenue expectation gapApproximately 60 basis points higherRelative to consensus expectations
• 2Q adjusted EBIT margin expectation gapApproximately 10 basis points higherRelative to consensus expectations
• 2Q EPS expectation gap5% higherRelative to FactSet consensus expectations
• Year-over-year cRPO growth14.2%Goldman Sachs estimates approximately 12% to 12.5% excluding acquisitions, down from 1Q
• Preliminary FY28 subscription revenue guidance11% growthConsistent with the growth rate in the second half of FY27
• FY28 adjusted EBIT margin guidanceApproximately 200 basis points of expansionPreliminary management commentary
• AI share of new ACV>25%AI products' share of new annual contract value
• Customer coverage of internally developed agents5,500 customers/approximately 50% of customersUsing at least one internally developed agent
• AI ARR$600mnUp $100mn quarter over quarter and tripling year over year
• Deployment Agent adoption4,600 customers, 24k users2Q query volume increased 500% quarter over quarter, with a long-term goal of reducing task completion time by 80% to 90%
• Adoption Agent adoptionMore than 200 customers within three days of launch94% customer satisfaction and a 70% reduction in customer release time
• FY2027E/FY2028E/FY2029E revenue estimates$10,655.7mn/$11,745.5mn/$12,848.9mnPrevious estimates were $10,662.1mn/$11,752.1mn/$12,855.7mn
• FY2027E/FY2028E/FY2029E EPS estimates$11.12/$13.99/$16.86Previous estimates were $10.96/$13.45/$16.68
• FY2027E through FY2029E EBIT margins31.2%/32.9%/33.3%The model projects continued margin expansion
• 12-month price target$164Raised from $151, based on 24x revised GAAP Q5 through Q8 EPS
• M&A rank3Corresponds to a low 0% to 15% probability of being acquired and is not included in the price target

Impact & implications

The report believes Workday has demonstrated initial demand for its products through AI ARR, customer coverage, usage volume, and efficiency improvements, but these metrics have not yet fully demonstrated sustainable monetization. The initial FY28 target of 11% subscription revenue growth reflects only a partial AI contribution; if new product launches and a better understanding of customer behavior drive higher paid conversion, revenue could see upside. Conversely, if pilots fail to convert into durable consumption revenue, AI adoption will be unlikely to improve the company's overall growth trajectory. Continued margin expansion and higher EPS estimates support the increased price target, but slowing underlying cRPO growth and commercialization uncertainty lead Goldman Sachs to maintain its Neutral rating.

Risks

• The pace of market share gains may fall short of expectations.
• M&A integration and execution involve risks.
• AI's impact on the HCM software market and Workday's business model remains uncertain.

What to watch

• Whether adoption of AI products continues to expand over the next 12 months.
• Whether agents currently in the pilot stage can convert into durable consumption-based revenue growth.
• Whether agentic workflows can provide net incremental growth to Workday's overall growth algorithm.
• Whether additional AI product launches and a better understanding of customer usage behavior can drive FY28 results above preliminary guidance.