Should investors buy into Workday’s turnaround story?

Actions of working day (DAY OF S 0.79%) rose last week after the software-as-a-service (SaaS) company’s fiscal 2Q25 results beat analysts’ estimates. However, the company’s stock is still down about 5% year to date.

Workday, which provides financial and human capital management software, cut its guidance in May due to weak headcount growth for its clients as well as the increasing length of transaction cycles. Let’s see if the company is back on track and if now is a good time to buy the stock.

Solid results and updated outlook

In addition to providing earnings results and providing guidance for the full year, Workday also adjusted its medium-term outlook, saying it expects lower revenue growth but higher operating margins in the coming years.

On the earnings call, Workday said that for fiscal years 2026 and 2027, it forecasts subscription revenue growth of about 15% and adjusted operating margins of about 30%. The last time the company discussed this outlook — during its September 2023 analyst day — it forecast subscription revenue growth between 17% and 19%, with adjusted operating margins of 25%.

The improved sentiment reflects the company’s belief that the current IT spending environment has become the “new normal.” However, it will continue to look for acquisitions to help support growth. At the same time, Workday will seek to become more efficient, including by using artificial intelligence (AI) to improve its internal processes.

For the fiscal second quarter, which ended July 31, Workday’s revenue rose 16.7% year over year to $2.09 billion as subscription revenue rose 17.2% to to 1.90 billion dollars. Adjusted earnings per share (EPS) rose 22% to $1.75. These results beat analysts’ consensus estimates, which called for revenue of $2.07 billion and EPS of $1.65.

The company reported a 16.1% increase in its 12-month subscription revenue to $6.80 billion, while total subscription revenue grew 20.9% to 21, 58 billion dollars.

It continues to support partnerships and has announced a new one with Equifax. Its employment verification connector for Equifax will allow customers to more easily submit data for employment verification requests. It also formed a partnership with Salesforce in the quarter to help accelerate employee onboarding and enable ongoing financial planning.

Workday ended the quarter with $7.37 billion in cash and marketable securities after repurchasing 1.4 million of its shares at a cost of $309 million in the quarter. It generated operating cash flow of $571 million and free cash flow of $516 million.

For fiscal 2025, subscription revenue is now expected to grow about 17% to $7.7 trillion to $7.725 billion, with an adjusted operating margin of 25.25%. Revenue guidance was unchanged from its previous review, although adjusted operating margin guidance was a slight improvement from its previous outlook of 25%.

Image source: Getty Images

Is the stock a buy?

Workday’s business has become more mature, and with it, the company is looking to better balance growth and profitability. This is not a bad thing, but it may continue to lead to a shift in the company’s shareholder base to more GARP (growth at a reasonable price) oriented investors.

Workday trades at a forward price-to-sales (P/S) ratio of 7.2 and a forward price-to-earnings (P/E) ratio of 31.5, based on analyst estimates for fiscal 2026. Given the percentage increase of the company’s estimated earnings in the mid-teens, these seem like reasonable valuations for the stock.

Data by YCharts.

However, the key for investors will be the company’s operating margin expansion, which should lead to much stronger earnings growth than revenue growth. This would make the stock more attractive from a valuation perspective and help boost its price in the coming years.

In the meantime, given the cash on its balance sheet and free cash flow generation, the company will have enough financial strength to make any attractive acquisitions it might find by continuing to buy back shares.

As such, interested investors can easily buy this stock because Workday takes an approach that balances upside and downside returns.