Workday (WDAY) is back in focus after reporting quarterly revenue of US$2.54b and net income of US$222m, alongside upbeat commentary about its AI agent platform and reaffirmed guidance with higher margin targets.

The upbeat quarter and AI product launches have given Workday a short-term lift, with a 1-day share price return of 5.16% and 30-day share price return of 7.00%. However, longer term total shareholder returns remain weak, with the 1-year total shareholder return down 46.16%.

If Workday’s AI push has your attention, it can be useful to see what else is happening in the sector, starting with 63 profitable AI stocks that aren't just burning cash.

With Workday stock down sharply over 1 year, yet carrying a low value score and trading below some analyst targets and an internal intrinsic estimate, the key question is simple: is this a reset opportunity, or is future growth already priced in?

Most Popular Narrative: 49.4% Undervalued

According to the most followed narrative, Workday’s fair value sits at $253.14, almost double the last close of $128.14. This puts a strong spotlight on what assumptions are doing the heavy lifting.

This narrative is brief and simply stands on the shoulders of the recent aggregate analysts review (Dec 2024). Put simply, if revenue grows at <15% pa and margins fall to <20% average over next 3 years, that implies a pretty consistent growth rate that contradicts the high PE ratio for this stock. A reasonable investor is not going to pay 50+ PE (for 2% returns on current price) for a company with proven growth <15%. Further, with the risk factors in play especially AI, the discount rate used by any investor should be higher to justify the returns. Thus, even allowing for revenue growth at 15% and margins at 20%, with discount rate holding at 7.08%, if PE acceptance falls to 30x then indicated fair value is $253.14. That still implies higher future growth than would have been demonstrated for 5-7 years up that point.

Want to see what kind of growth path and profit profile could still justify that valuation reset, even with a lower future earnings multiple and a higher discount rate? The key tension here is how the narrative balances moderating revenue growth, firmer margins and a compressed P/E to still land at a fair value that sits far above today’s price.

Result: Fair Value of $253.14 (UNDERVALUED)

However, this narrative could be challenged if Workday’s AI products see slower customer adoption than expected, or if investors lose confidence in paying a 30x future P/E ratio.

Another View: Market Ratio Check

The SWS fair ratio suggests Workday’s current P/E of 37.4x sits above where the market could settle, at a fair ratio of 35.6x. It is also higher than both the US Software industry average of 28.4x and the peer average of 29.3x. This points to valuation risk if sentiment cools.

For investors comparing this with the earlier fair value of $253.14, the question is whether the market eventually leans toward that higher intrinsic estimate or toward the lower P/E levels implied by history and peers.

Next Steps

Curious whether the mixed signals in this article line up with your own take on Workday? Act while the data is fresh, review the full breakdown of the company’s potential upside and risks, and pressure test your thesis against the 3 key rewards

Looking for more investment ideas?

Do not stop with one stock story when you can quickly scan fresh ideas, spot patterns across sectors, and pressure test where your next dollar should really go.

• Target potential mispricing by checking out 48 high quality undervalued stocks that combine quality fundamentals with room for sentiment to catch up.
• Prioritise resilience by reviewing 69 resilient stocks with low risk scores that score well on financial strength and volatility checks.
• Get ahead of the crowd by using the screener containing 21 high quality undiscovered gems before attention and capital fully catch up.

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.