Workday stock has had a tough run over the past year. At around US$141 per share, the valuation checks suggest it is closer to fairly priced than an obvious bargain.

• Workday shares declined about 41% over the past year, which puts recent performance firmly in negative territory even before looking at any valuation metrics.
• Expectations around Workday's ability to convert subscription revenue into consistent cash flow can support the current price, while any pressure on margins or higher investment needs may weigh on how much investors are willing to pay.
• With only 2 of 6 valuation checks screening as attractive, Workday does not appear to be a clear bargain on the broader metrics.

The issue now is whether the current share price fairly reflects Workday's fundamentals after such a weak 1 year return, or if the stock still leans expensive.

Does Workday Look Fairly Valued on Earnings?

The P/E ratio suits Workday because investors often focus on its ability to turn subscription revenue into earnings. On this measure, Workday trades at about 41.2x earnings, compared with a Software industry average of roughly 28.1x and a peer group average near 25.3x. That places the stock at a clear premium to many software peers on a simple earnings basis.

The valuation model suggests a fair P/E ratio for Workday of about 37.5x, which is moderately below the current 41.2x level. This indicates that the market is asking somewhat more than the model implies, but not by a wide margin. The difference suggests that investors are still willing to pay a premium for Workday stock relative to the tailored fair multiple, though the gap is not large.

Overall, Workday stock appears roughly fairly valued on its P/E multiple, with only a mild premium to the model’s fair ratio.

The Workday Narrative: What Would Justify Today's Price?

For Workday, Simply Wall St Narratives sit between the current P/E puzzle and the practical question of what would need to happen next in terms of growth, margins, and earnings for the stock to be worth materially more or less than today’s price. These Narratives are available on Simply Wall St’s Community page.

Rather than relying on a single multiple or model line, each Narrative lays out the assumptions that sit behind its fair value view so you can compare those expectations with the actual results as Workday reports them.

Community views on Workday are split, with one camp seeing reset upside tied to AI and margins while the other worries about execution risk and legal overhangs.

Bull case: 18% undervalued

"Broad adoption of Workday's AI-enabled HR and finance products (with >70% of customers using Workday Illuminate and >75% of net new deals including at least one AI product), along with acquisitions like Paradox and Flowise, is fueling cross-sell and upsell activity, increasing average contract values and bolstering future topline growth..."

Bear case: 23% overvalued

"Although AI products contributed around 1.5 percentage points to ARR growth and are included in over three quarters of net new deals, the heavy investment needed to keep AI capabilities competitive could limit how much of that AI related demand flows through to net margins and earnings..."

Do you think there's more to the story for Workday? Head over to our Community to see what others are saying!

The Bottom Line

Workday screens as about right on current market multiples, with the P/E sitting at a modest premium to the model’s fair ratio rather than at an extreme. Broader valuation checks, however, are not especially supportive, which makes it harder to argue the stock is clearly cheap even after a weak 1 year return. From here, the key question is whether Workday can sustain the earnings and margin profile that would keep investors comfortable paying this premium, or whether ongoing investment and execution risks push the market toward a lower multiple.

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.