With Workday Leaning Into AI, Is Its Turnaround Working? Should Investors Buy the Stock Right Now?

With shares trading slightly below where they finished trading at toward the end of 2021, Workday (NASDAQ: WDAY) needs to reinvigorate its stock price. Its shares got a boost following the software-as-a-service (SaaS) company's Q4 reports and guidance as it leans into artificial intelligence (AI) to help drive growth.

Despite the recent gains, the financial and human capital management software company is still down more than 10% over the past year, as of this writing. Let's dig into its Q4 results and guidance to see if investors should buy the stock right now.

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Expanding operating margins

For its fiscal 2025 Q4 ended January 31, Workday was able to produce results that topped analyst expectations. Revenue grew 15% year over year to $2.21 billion, with subscription revenue jumping 16% to $2.04 billion. That was just ahead of the $2.025 billion in subscription revenue it had forecast, while total revenue edged past the $2.18 billion analyst consensus, as compiled by LSEG. Adjusted earnings per share (EPS) climbed 22% to $1.92, easily surpassing the $1.78 consensus.

AI was once again a big driving factor in its revenue growth, with 30% of customer expansions including at least one AI product. It said that its Extend Pro product, which allows customers to build AI applications on top of its platform, continues to be one of its fastest-growing products, with ACV (annual contract value) more than doubling sequentially. It also highlighted its Recruiting Agent AI solution, which saw its ACV nearly double quarter over quarter.

Workday said it added a number of big customers in the quarter and now has 11,000 customers across various industries and geographies. It added that it serves more than 60% of the Fortune 500 and 30% of the Global 2000. Meanwhile, partnerships are also helping drive growth, with 15% of its new Q4 ACV coming from this channel.

Workday's 12-month subscription revenue backlog rose by 15% to $7.63 billion, while its total subscription revenue backlog soared 20% to $25.06 billion. Both of these measure can be an indication of future revenue growth.

The company continues to cash flow machine, producing operating cash flow of $2.46 billion and free cash flow of $2.19 billion for fiscal 2025. It ended the fiscal year with $8 billion in cash and marketable securities and nearly $3 billion in debt. It bought back 2.9 million shares at a cost of $700 million during the year. Its buybacks are done mostly to offset shareholder dilution from stock-based compensation.

Looking ahead, the company forecast fiscal year 2026 subscription revenue to grow by 14% to $8.8 billion. It is looking for an adjusted operating margin of about 28%, which would be a nice uptick from the 25.9% in adjusted operating margin it managed in fiscal 2025. The revenue guidance was unchanged versus its prior expectation, while its adjusted operating margin was up from its prior guidance of 27.5%

For fiscal Q1, it expects subscription revenue to grow by 13% to $2.05 billion, with an adjusted operating margin of about 28%.

Workforce noted that while others rushed to monetize their AI offerings, it initially added these features to its core offerings. Now that its AI solutions are showing strong ROI (return on investment), it will look toward new monetization opportunities with them. It recently launched four new AI agents for contracts, payroll, financial auditing, and policy. It said these are non-task agents, unlike most in the market today, with each agent having multiple skills that can support people in their roles.

Image source: Getty Images.

Is it time to buy the stock now?

Workday is no longer the ultra-high-growth name it was before the pandemic, when it would regularly put up 30% or more revenue growth. However, it is settling into a solid mid-teens revenue growth company that is starting to see some nice operating leverage, as demonstrated by the meaningful increase in adjusted operating margins it is projecting for fiscal 2026. The improving operating leverage means that its earnings should grow much more quickly than its revenue growth.

That's still a highly attractive business at the right valuation. On that front, the company trades a forward price-to-sales (P/S) ratio of 7.6 and a forward price-to-earnings (P/E) ratio of just over 32 based on analysts' fiscal 2026 estimates.

WDAY PE Ratio (Forward) data by YCharts

That's a reasonable valuation for a stock in this market with Workday's high-margin, predictable SaaS model. Meanwhile, the company is seeing strong traction with its new AI solutions that should continue to drive revenue, while it will also look to continue to drive operating margin expansion as well.

The combination of AI-fueled revenue growth and expanding operating margins makes Workday stock a buy in my book.

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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Workday. The Motley Fool has a disclosure policy.