Workday’s (NASDAQ: WDAY) May stock price implosion is a signal for AI investors to buy. The drop was caused by a tepid guide that included an expectation for sustained and accelerating double-digit growth and comes with a high likelihood of being beaten. Not only has Workday outperformed its consensus estimates for top and bottom line results 99.5% of the time since 2020, but the Q2 outlook and reaffirmed 2025 guidance reflect none of the Q1 strength.

The Q1 strengths are substantial, including backlog growth, margin expansion, and free cash flow improvements. The takeaway for investors is that at $235, Workday's price offers a low risk-to-reward profile and potential catalyst for higher prices in upcoming earnings reports. 

Analysts are a headwind in late Q2 but are helping to set up a stock price rebound for later in the year. Most revisions following the Q2 release are price target reductions, with the low end leading to the $250 level. The critical details are that this stock remains a Moderate Buy rated and the revision activity aligns with the consensus estimates.

The total and trimmed revisions average is $290, about $3 or 100 basis points below the consensus. Consensus forecasts an 18-month closing high, a 17% gain from the critical support level; the market catalyst will be a reversion to price target increases spurred by upcoming business strength. 

Workday Builds Momentum in Q1 With Agentic AI and Automation

Workday had a solid quarter in Q1 with its core subscription business growing by 13.4%, driving a 12.6% top-line gain, 100 basis points better than MarketBeat’s reported consensus. The strength is in long-term contracts and large clients, including increased business with names like Chipotle Mexican Grill and new business with names like United Airlines and Dover Corporation. 

Other strengths were seen in the margins. The company expanded its gross and operating margins due to improved revenue leverage and operational quality, driving a 430-basis-point increase in the adjusted operating margin and a significant improvement in cash flow and free cash flow.

Adjusted profit grew by 31% and adjusted earnings by 28%, outpacing the consensus by 1100 basis points, while cash flow increased by 22% and free cash flow by 44%. The critical takeaway is that the free cash flow is sufficient to cover the share buybacks and sustain the healthy balance sheet. 

The guidance is the market’s sticking point. The company reaffirmed the outlook for 2025 despite the Q1 strength, forecasting a weaker-than-consensus result in Q2. However, Q2 subscription revenue growth is predicted to accelerate, and the guidance is likely low. Details like the 15.6% increase in long-term subscription backlog and 19% increase in total subscription backlog suggest the outperformance could be substantial. 

Workday’s Balance Sheet Is a Fortress for Tech Investors to Take Shelter In

Workday’s balance sheet is a fortress and getting stronger by the quarter. The improved cash flow allows for accelerating share repurchases, which are on the brink of overtaking dilutive actions, including share-based compensation.

Highlights at the end of Q1 include reduced cash and total assets, flat equity and share count, but leverage remains low, the company is net cash, and the stage is set for value gains later in the year. 

The question now is what the institutions will do. The institutions own about 90% of the stock and are the primary force behind long-term market direction. They have been buying in 2025, but activity slowed in Q2. The post-release price plunge puts the market back into the institutional buying range.

If they fail to support the market now, this stock could fall below critical support and revert to previous lows. 

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