Workday (WDAY): A Strategic Buy at Current Levels Amid Strong Fundamentals and Buyback Fuel

The recent dip in Workday (WDAY) shares following its May 22, 2025 earnings report has created a rare opportunity for investors to buy into one of the cloud's most resilient software leaders. While the stock dropped 12.5% the day after earnings—a sharp contrast to its historical 60-67% likelihood of positive post-earnings performance—the fundamentals remain robust. With a new $1 billion buyback program, accelerating AI-driven innovation, and a backlog signaling future revenue growth, this pullback is a buying opportunity, not a warning sign.

The Earnings Dip: A Temporary Blip, Not a Trend

Workday reported Q1 FY2026 revenue of $2.24 billion, a 12.6% year-over-year increase, easily surpassing consensus estimates of $2.22 billion. Subscription revenue rose 13.4% to $2.06 billion, fueled by its expanding customer base, which now includes 60% of the Fortune 500. Non-GAAP diluted EPS hit $2.23, handily beating estimates of $2.01 and marking a 28.7% increase from the prior year.

The stock's 12.5% drop on May 23, 2025, stemmed largely from GAAP net income falling to $0.25 due to $166 million in restructuring costs—a one-time expense excluded from non-GAAP metrics. Investors, however, often overlook such non-recurring charges, focusing instead on recurring revenue and margin trends. Here, Workday delivered: non-GAAP operating margins expanded to 30.2%, up from 25.9% a year ago, and free cash flow hit $421 million, a 94% year-over-year jump.

The Case for Buying Now: Fundamentals Are Bulletproof

1. Revenue Momentum: Subscription revenue backlog grew 15.6% to $7.63 billion, a clear sign of recurring demand. With 84% of annual revenue now recurring, Workday's model is recession-resistant.
2. Margin Expansion: The company reaffirmed its FY2026 non-GAAP operating margin target of 28.5%, up from 25% in FY2025. This efficiency gains are being driven by automation and AI integration, not cost-cutting.
3. Cash and Buybacks: With $7.97 billion in cash and a new $1 billion buyback program, Workday has the financial flexibility to repurchase shares aggressively. The prior $1 billion buyback program reduced shares outstanding by 4% in 12 months—a pattern likely to repeat.

Growth Catalysts: AI and Strategic Partnerships

Workday's AI roadmap is its most compelling long-term driver. Over 50 AI use cases are already in production, and 25 generative AI projects are in development. These tools, embedded into its HCM and financial management platforms, are reducing customer churn and boosting upsell opportunities.

Recent wins with Dover Corporation and United Airlines highlight Workday's ability to land marquee accounts. Meanwhile, its partnership with Google Cloud to deploy its platform in the U.K. signals geographic expansion. These moves are underpinned by a 73% retention rate among enterprise customers—a testament to product stickiness.

Risks? Yes, but Manageable

• Economic Downturn: While a recession could slow enterprise software spending, Workday's recurring revenue model and focus on mission-critical HR and finance systems make it less vulnerable.
• Competitor Pressure: SAP and Oracle are stepping up their cloud efforts, but Workday's AI-driven differentiation and Fortune 500 customer loyalty create a moat.

Why the Dip Is a Buying Opportunity

At its May 23 closing price of $239.93, Workday trades at just 28.7x FY2026 non-GAAP EPS estimates—a 20% discount to its five-year average P/E of 36x. This valuation gap suggests the market is pricing in worst-case scenarios, ignoring Workday's margin expansion and buyback tailwinds.

The stock's historical post-earnings volatility (median 8.1% gain over five years) suggests the recent pullback is an anomaly. With shares down 30% from their 2023 peak, this is a rare entry point for long-term investors.

Final Takeaway: Act Now Before the Rally Resumes

Workday's fundamentals are too strong to ignore. The restructuring costs that spooked investors are temporary, while its AI-powered growth, fortress balance sheet, and buybacks are all engines of long-term value. This is a stock to buy on dips—not avoid.

The next catalyst? The Q2 FY2026 earnings report in August 2025, where guidance for 2027 could solidify its AI-driven trajectory. For investors willing to look past short-term noise, Workday offers a compelling risk/reward: low valuation today, high growth ahead. This is the time to act.

Disclosure: This analysis is for informational purposes only and should not be interpreted as investment advice. Always conduct your own research or consult a financial advisor.