Workday (WDAY) is back in the spotlight after announcing an expanded partnership with Google Cloud that embeds Workday’s AI agents and Sana platform into Gemini Enterprise, tying HR, finance, and analytics workflows more tightly to AI.

The stock has sharply rebounded in the short term, with a 7-day share price return of 22.7% and a 30-day share price return of 23.84%. However, longer term total shareholder returns over 1, 3, and 5 years remain meaningfully negative. This suggests that recent AI focused product launches and the Google Cloud partnership are improving sentiment after a tougher stretch.

If this AI momentum has your attention, it could be a good moment to see what else is emerging in this space and review our screener of 31 AI small caps

With Workday shares rebounding sharply, but longer term returns still in the red, the real question now is whether the recent AI and Google Cloud news leaves the stock undervalued, or if the market is already pricing in future growth?

Most Popular Narrative: 12.3% Undervalued

Workday's most followed valuation narrative pegs fair value at $179.22 per share, above the last close of $157.23. This frames the recent AI news in a different light.

Workday is positioned to benefit from the accelerating demand for cloud-native and AI-powered enterprise solutions, as organizations continue replacing legacy on-premise systems and prioritize digital transformation, driving sustained subscription revenue growth and expanding backlog.

Curious what earnings, margins, and valuation multiple this narrative needs to bridge today’s price to that fair value, and how much growth is baked in.

Result: Fair Value of $179.22 (UNDERVALUED)

However, there are clear pressure points, including heavier AI and M&A spend that may not translate into efficiency gains, as well as rising regulatory and data privacy demands that could weigh on margins.

Another View: Valuation Gap Or Value Trap?

That 12.3% discount to fair value from the narrative sits awkwardly against how the market is pricing Workday today. The stock trades on a P/E of 45.8x, compared with 29.3x for the US Software industry and 27.8x for peers, while the fair ratio is 38x.

In plain terms, the share price already carries a higher multiple than both the sector and peer group. There is room for the ratio to compress toward the 38x fair ratio if sentiment cools, which could pressure returns even if earnings keep growing. This raises the question of whether this discount is really a margin of safety or just a premium story in disguise.

Next Steps

With sentiment mixed between rebound optimism and valuation questions, now is a good time to review the numbers yourself and act promptly while opinions are still forming. To see what the market is optimistic about, review the company's 3 key rewards

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.