Workday: Are the AI Disruption Fears Real, or Is It Time to Buy the Stock on the Dip?

Core Viewpoint - Market concerns regarding artificial intelligence (AI) as a threat to Workday's business model have negatively impacted its stock price, despite the company reporting better-than-expected fiscal results [1][2] Company Performance - Workday's Q2 revenue increased nearly 13% year over year to $2.35 billion, with subscription revenue climbing 14% to $2.17 billion, and adjusted earnings per share (EPS) rising 26% to $2.21, surpassing analyst expectations [8] - The company's 12-month subscription revenue backlog grew by 16% to $7.91 billion, while total subscription revenue backlog rose nearly 18% to $25.37 billion [8] - Workday ended the quarter with $8.19 billion in cash and marketable securities, $3 billion in debt, and generated operating cash flow of $616 million and free cash flow of $588 million [10] AI Integration - Over 75% of sales to new customers included an AI solution, and 30% of sales to existing customers did, leading to a more than doubling of new net annual contract value from AI products year over year [5] - Workday's primary AI platform, Workday Illuminate, is designed to provide customers with a comprehensive human resource and finance database, along with AI agents for various tasks [6] Strategic Moves - Workday announced its agreement to acquire Paradox, an AI company aimed at simplifying the hiring process, as part of its strategy to enhance its AI capabilities [7] Market Outlook - Management raised its fiscal 2026 guidance slightly, expecting revenue growth of 13% to approximately $9.515 billion and subscription revenue growth of about 14% to $8.815 billion, with the new figures reflecting contributions from the Paradox acquisition [11] - CEO Carl Eschenbach characterized market fears about AI disrupting seat-based SaaS models as "completely overblown," attributing slower customer headcount growth to previous over-hiring rather than AI's impact [12] Valuation - Workday's stock trades at a forward price-to-sales (P/S) ratio of 6.2 and a forward price-to-earnings (P/E) ratio of 25, which is considered attractive given projected mid-teens percentage revenue growth and strong earnings growth [15]