In recent years, Workday has established itself as a leading software company in financial and human capital management. However, the company’s stock has remained stable without significant growth. Following a 12.5% drop after the release of its fiscal 2026 first-quarter earnings report, Workday’s stock is currently trading at levels similar to the end of 2020.
Investor disappointment arose from the software-as-a-service (SaaS) company’s conservative guidance, mainly due to uncertainties about the impact of new tariffs on the economy. This caution is common among companies in the current economic climate.
Despite this, Workday is investing in the artificial intelligence (AI) trend, suggesting that the recent drop might present a buying opportunity.
### Workday Reports Revenue Growth and Expanding Margins
While the company’s shares declined, its fiscal 2026 Q1 results surpassed analysts’ expectations in revenue and earnings. For the period ending April 31, revenue increased by 12.6% year-over-year to $2.24 billion, with subscription revenue up by 13.4% to $2.06 billion. Adjusted earnings per share rose 28% to $2.23.
AI contributed significantly to this growth, with 25% of customer expansions including at least one AI product. The annual contract value of AI products more than doubled compared to the previous year. Workday’s management highlighted the launch of new AI agents aimed at enhancing talent potential, reducing costs, accelerating decision-making, and mitigating risks. The ExtendPro solution, allowing customers to build AI applications on Workday’s platform, also showed growth.
Workday serves over 60% of the Fortune 500, yet 75% of its clients have fewer than 3,500 employees. The company is targeting medium-sized enterprises with its new WorkdayGo solution, designed to bring customers onto its platform in 30 to 60 days with a pre-configured deployment.
The company’s 12-month subscription revenue backlog increased by 15.6% to $7.63 billion, and the total subscription revenue backlog rose by 19% to $24.62 billion, indicating potential future revenue growth.
Workday continued to generate strong cash flow, with operating cash flow at $457 million and free cash flow at $421 million during the quarter. The company concluded the quarter with $8 billion in cash and marketable securities and nearly $3 billion in debt. Additionally, it repurchased 1.3 million shares, primarily to offset shareholder dilution from stock-based compensation distributions.
Looking forward, Workday maintained its full-year guidance for a 14% increase in subscription revenue to $8.8 billion. The company did, however, raise its adjusted operating margin forecast from 28% to 28.5%, up from 25.9% last year. For its fiscal Q2, the company projects a 13.3% increase in subscription revenue to $2.16 billion, with an adjusted operating margin of about 28%.
Workday reported no significant impacts from tariffs or macroeconomic conditions and anticipates slight acceleration in subscription revenue growth in the second half of the year.
### Evaluating Workday’s Market Position
As Workday’s revenue growth has slowed over time, its stock price has remained stable, and its price-to-sales (P/S) and price-to-earnings (P/E) ratios have decreased. With the company now experiencing operational leverage, faster earnings growth is being realized.
Currently, Workday’s stock trades at a forward P/S multiple of 6.7 and a forward P/E of 27, based on analysts’ estimates for the current fiscal year. These valuations appear appealing for a business with high margins, strong customer retention, and mid-teens revenue growth.
Workday’s AI offerings are gaining traction, and if AI can drive further growth, the stock may see significant upward momentum. The solid growth in its backlog reinforces the potential for revenue acceleration. The primary risk remains the potential for economic weakness to impact enterprise software spending.
Given these factors, the current dip might offer a strategic opportunity for stock accumulation.
