Workday Shares Sink on Revised Guidance. Is It Time to Buy the Dip in the Stock?

Core Viewpoint - Workday's recent fiscal guidance has disappointed investors, leading to a decline in its stock price, which is down approximately 6% year-to-date despite strong S&P 500 performance [1][2] Financial Performance - For fiscal Q3 2025, Workday reported a 16% year-over-year revenue increase to $2.16 billion, with subscription revenue also rising 16$1.959 billion, slightly exceeding previous forecasts [3] - Adjusted earnings per share (EPS) increased by 21% to $1.89, surpassing the consensus estimate of$1.76 [3] - The company's operating cash flow was $406 million, and free cash flow was$359 million, ending the period with $7.16 billion in cash and marketable securities against$2.98 billion in debt [5] Future Guidance - Workday revised its full-year subscription revenue growth outlook to approximately $7.703 billion, indicating a growth rate of about 17$2.025 billion, reflecting a 15% growth, and an adjusted operating margin of 25% [7] - Looking ahead to fiscal year 2026, Workday anticipates growth of about 14% to $8.8 billion with adjusted operating margins around 27.5% [8] Strategic Focus - The company is increasingly leveraging artificial intelligence (AI), with 30% of customer expansions in the quarter attributed to AI solutions [4] - Workday aims to penetrate the government sector, targeting outdated on-premise systems for cloud migration, which could enhance efficiency and reduce costs [10] Valuation Metrics - Workday's forward price-to-sales (P/S) ratio is 7.2, and the forward price-to-earnings (P/E) ratio is just over 31 based on fiscal 2026 estimates, which is considered appropriate given its growth outlook [11] - The company is focused on maintaining mid-teens revenue growth while expanding operating margins, projecting an increase from 25.5% this year to 27.5% next year [13] Investment Consideration - If Workday achieves its forecasted growth and margin expansion, it could see strong earnings growth, which may positively impact its stock price [14]