Workday (WDAY 1.20%) share prices dipped last week despite the software-as-a-service (SaaS) company reporting results for its fiscal 2026 second quarter that topped analysts' consensus estimates. The stock is down by around 14% this year as of this writing.
Workday provides financial and human capital management software, and like many broad-based SaaS companies, its stock has struggled as investors try to predict how artificial intelligence (AI) will change the enterprise software landscape. The reason for this is that AI tools can start to automate tasks that previously had to be performed by employees, which can impact companies like Workday that have seat-based pricing models.
So after a slide that began in early 2024, is Workday stock now a buying opportunity, or would investors be better advised to stay on the sidelines?
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Solid results but subdued outlook
As AI changes the software landscape, Workday is leaning into the technology. In the fiscal quarter, which ended on July 31, more than 75% of its sales to new customers included an AI solution, while 30% of sales to existing customers did. This resulted in its new net annual contract value from AI products more than doubling year over year in the quarter.
Workday's primary AI platform is Workday Illuminate, which management boasts gives customers the "largest and cleanest" human resource and finance database in the world. From there, the platform provides AI agents that can help with HR, finance, and legal tasks. The company also offers several AI-specific products, such as Talent Optimization, Recruiting Agent, and Contract Intelligence Agent.
To help continue its push into AI, Workday also last week announced its agreement to acquire Paradox. The AI company's solution is meant to make the hiring process easier.
Turning to its results, Workday's Q2 revenue rose nearly 13% year over year to $2.35 billion as subscription revenue climbed 14% to $2.17 billion. Adjusted earnings per share (EPS) jumped 26% to $2.21. That was ahead of consensus estimates for revenue of $2.34 billion and EPS of $2.11, according to analysts polled by LSEG. The company's 12-month subscription revenue backlog jumped by 16% to $7.91 billion, while its total subscription revenue backlog rose by nearly 18% to $25.37 billion.
Workday said it was feeling some pressure in its state and local government and higher education (SLED) business segment. It noted that while many colleges have lost some of their federal funding, the company did win a big competitive deal in the quarter with the University of Virginia. Meanwhile, it said everything else has been pretty consistent with the new normal.
Another area management was watching -- the international market -- rebounded with a strong quarter. Workday saw strong growth in Europe and secured some nice wins in the Asia-Pacific region.
Workday ended the quarter with $8.19 billion in cash and marketable securities on its books and $3 billion in debt after repurchasing $299 million worth of shares in the quarter. It generated operating cash flow of $616 million and free cash flow of $588 million.
Looking ahead, Workday management raised its fiscal 2026 guidance slightly -- it now expects revenue to grow by 13% to about $9.515 billion and subscription revenue to grow by about 14% to $8.815 billion. The prior outlook was for revenue of $9.5 billion and subscription revenue of $8.8 billion. However, these new figures include contributions from the Paradox acquisition; without that deal, its guidance was basically unchanged.
Should investors buy the dip?
On the earnings call, Workday CEO Carl Eschenbach described the market's worries that AI would disrupt seat-based SaaS models as "completely overblown." He noted that while its customer headcount growth has moderated, it is still growing. He also said that the slower growth pace was much more a result of companies having previously over-hired than a result of the impact of AI.
Given that it was widely reported that many major tech companies were hoarding talent a few years back, Eschenbach's comments make sense. Meanwhile, if there are any changes in the number of workers that companies employ, SaaS companies will have the option to transition to consumption or outcome-based pricing models.
As for Workday, AI is currently helping it achieve solid sales growth. It may no longer be clocking the 20% to 30% year-over-year revenue growth it did in the past, but it's starting to see strong operating leverage with robust profitability growth.
The stock now trades at a forward price-to-sales (P/S) ratio of 6.2 and a forward price-to-earnings (P/E) ratio of 25, based on analysts' fiscal 2026 estimates. Given its projected mid-teens percentage revenue growth and strong earnings growth, that's an attractive valuation in my view.
Right now, Workday looks like a solid GARP-oriented (growth at a reasonable price) option for investors. As such, I think investors can buy the dip.
