Shares of human-resources software maker Workday (WDAY 1.16%) tumbled 13.8% through 11:40 a.m. ET on Friday, despite beating expectations in the company's first-quarter 2024 earnings report Thursday night.
Heading into earnings, analysts forecast Workday would earn $1.58 per share on sales of $1.97 billion. The company edged out the revenue prediction with sales of $1.99 billion, and beat the per-share guess soundly, earning $1.74.
Workday first-quarter earnings
But not all the news was good. Sales for the quarter climbed 18.1% year over year, and subscription revenue was up an even stronger 18.8%. But Workday's earnings were more of a bad news, good news situation.
The bad news: The $1.74 profit per share was an adjusted number. Using generally accepted accounting principles (GAAP), the company really earned only $0.40 per share.
The good news: Even $0.40 was a whole lot better than the $0.00 it earned in the first quarter of 2023.
Is Workday stock a sell?
What really seems to have spooked investors is the fact that Workday's backlog of subscription work grew only 17.9%, implying future revenue growth might turn slower. And confirming that suspicion, management warned that subscription revenue will probably only grow 17% this year, to about $7.7 billion, including second-quarter subscription-revenue growth of 17%, to $1.9 billion.
If correct, this will be slightly less than Wall Street was hoping for -- not a good look for a growth stock. In a nutshell, this is why Workday stock is sinking. But should investors be selling?
Not necessarily. While richly valued at 50 times trailing earnings, Workday stock costs a more-modest 34.5 times free cash flow. And long-term forecasts still have the stock growing its profits at about 20% annually over the next five years.
That's not a cheap valuation at all, and this is why any slip-up in growth will have an outsize effect on the stock price. But Workday isn't crazily overvalued right now. And if the stock falls any further, it could become a buy.
