Workday’s Q1 Earnings Report Shows Growth Amid Stock Price Slump

Workday (NASDAQ: WDAY) has remained stagnant, with its stock price roughly unchanged since late 2020. The company saw a 12.5% drop following the fiscal 2026 Q1 earnings release.

Investors expressed disappointment over Workday’s cautious guidance, particularly in light of economic uncertainties related to new tariffs.

Positive Financial Performance Despite Stock Decline

Despite the stock decline, Workday reported fiscal 2026 Q1 results that exceeded analyst expectations. For the three-month period ending April 31, revenue grew by 12.6% year over year to $2.24 billion, with subscription revenue up 13.4% to $2.06 billion. Adjusted earnings per share (EPS) increased by 28% to $2.23.

AI initiatives significantly contributed to growth, with 25% of customer expansions incorporating AI products. New annual contracts for AI products more than doubled from last year. Management highlighted the launch of new AI agents designed to enhance decision-making and mitigate risks. The ExtendPro solution, allowing customers to develop AI applications on Workday’s platform, has also seen growth.

Although Workday serves more than 60% of the Fortune 500, 75% of its clients are small to medium-sized businesses. The new WorkdayGo solution aims to facilitate quicker onboarding for these customers within 30 to 60 days.

Workday’s 12-month subscription revenue backlog grew by 15.6% to $7.63 billion, while total subscription revenue backlog increased by 19% to $24.62 billion, indicating potential future revenue growth. The company generated operating cash flow of $457 million and free cash flow of $421 million this quarter, ending with $8 billion in cash and marketable securities, alongside nearly $3 billion in debt. It repurchased 1.3 million shares, primarily to counter dilution from stock-based compensation.

Looking ahead, management maintained its guidance for full-year subscription revenue to grow by 14% to reach $8.8 billion and increased its adjusted operating margin forecast from 28% to 28.5%, up from 25.9% last year. For fiscal Q2, Workday estimates subscription revenue to rise by 13.3% to $2.16 billion and an adjusted operating margin of about 28%.

Workday reported no significant impacts from tariffs or macroeconomic challenges on its performance and anticipates slight acceleration in subscription revenue growth in the second half of the year.

Investment Outlook for Workday

As Workday’s revenue growth slows, its stock valuation includes a forward price-to-sales (P/S) multiple of 6.7 and a forward price-to-earnings (P/E) ratio of 27. Despite these lower multiples, the company’s improved operating leverage indicates potential for robust earnings growth.

Workday’s AI product traction could provide a boost, and if growth accelerates in the latter half of the year, its stock could show significant upside. Current backlog growth supports this revenue acceleration, although economic downturns could impact enterprise software spending.

Considering the current price levels, accumulating shares might be a strategic move for investors.

Should You Invest $1,000 in Workday Right Now?

Before deciding to invest, it’s important to note that Workday was not included on a recent list of recommended stocks. This list of ten stocks could produce significant returns in the coming years.

Investors should reflect on past recommendations that resulted in substantial gains, reinforcing the need for thorough analysis before making any investment decisions.

Geoffrey Seiler holds no positions in the stocks mentioned. The Motley Fool has positions in and recommends Workday.

The views outlined here are those of the author and may not reflect those of Nasdaq, Inc.