While Workday (WDAY 2.55%) has established itself as a leading financial and human capital management software company, its stock has been stuck in neutral for years. In fact, after a 12.5% drop following the release of its fiscal 2026 first-quarter earnings report, Workday's stock now trades right around the same level it was at the end of 2020.
Investors were disappointed with the software-as-a-service (SaaS) company's conservative guidance. Given the uncertainty about how new tariffs will impact the economy, it's not surprising that many companies are offering more cautious outlooks.
However, Workday is leaning into the artificial intelligence (AI) trend, and in that context, the dip might be a good buying opportunity.
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Workday reports solid revenue growth and expanding operating margins
While its shares tumbled, Workday's fiscal 2026 Q1 results actually exceeded analysts' consensus expectations on both the top and bottom lines. For the period, which ended April 31, revenue rose 12.6% year over year to $2.24 billion, with subscription revenue climbing 13.4% to $2.06 billion. Adjusted earnings per share (EPS) jumped 28% to $2.23.
AI once again helped drive growth, as 25% of customer expansions included at least one AI product. New annual contract value across its AI products more than doubled year over year. Meanwhile, management noted that the company had just launched a new wave of AI agents that will help "amplify talent potential, reduce costs, accelerate decision-making, and mitigate risk." It also called out the growth of its ExtendPro solution, which lets customers build AI applications on its platform.
While it serves more than 60% of the Fortune 500, the company highlighted the fact that 75% of its clients have fewer than 3,500 employees. As such, it is now looking to go after medium-sized enterprises with its new WorkdayGo solution, which can get these customers up and running on its platform within 30 to 60 days with a pre-configured deployment.
Workday's 12-month subscription revenue backlog climbed by 15.6% to $7.63 billion, while its total subscription revenue backlog jumped 19% to $24.62 billion. Both of these metrics can be indicative of future revenue growth.
The company continued to be a strong cash flow generator, producing operating cash flow of $457 million and free cash flow of $421 million in the quarter. It ended the quarter with $8 billion in cash and marketable securities and nearly $3 billion in debt. It also bought back 1.3 million shares in the quarter -- purchases mostly intended to offset the shareholder dilution that would otherwise be the result of its stock-based compensation distributions.
Looking ahead, management maintained its full-year guidance for subscription revenue to grow by 14% to $8.8 billion. However, it did increase its adjusted operating margin forecast from 28% to 28.5%. The company's operating margin has been expanding nicely -- it was 25.9% last year.
For its fiscal Q2, it expects subscription revenue to grow by 13.3% to $2.16 billion, with an adjusted operating margin of about 28%.
Workforce said it has not seen any significant impact on its business and growth prospects due to tariffs or macroeconomic headwinds. Meanwhile, it is looking for subscription revenue growth to accelerate slightly in the second half.
Is it time to buy the dip on Workday?
As Workday's revenue growth has slowed over the years, its stock price has stayed around the same levels while its price-to-sales (P/S) and price-to-earnings (P/E) multiples have shrunk. However, as the company has matured, it is now seeing a lot of operating leverage in its business, which is leading to faster earnings growth.
Today, the 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. For a high-margin business with strong customer retention, a mid-teens revenue growth percentage, and even faster earnings growth, that valuation looks compelling.
Workday's AI offerings appear to be gaining some solid traction, and if AI can help accelerate its growth in the back half of the year, the stock should have some solid upside from here. Its solid backlog growth, meanwhile, seems to support the potential for this revenue acceleration. The biggest risk would be if economic weakness leads to a disruption in enterprise software spending.
As such, I'd look to start accumulating the stock on this dip.
