Workday expects FY2028 revenue growth around 11%, a slowdown from the past decade; AI recurring revenue is $600 million but small. At forward P/E 14.1, near its lowest since late 2023 versus over 40 before, WDAY looks cheap and undervalued; he calls it a buy, but with low conviction due to no DCF; he rarely follows it.

Workday expects its revenue for fiscal year 2028 to grow at a double-digit rate. In addition, the company expects a non-GAAP operating margin of 31% in the next quarter. They also expect a 200 basis point improvement in their operating profit margin even as they invest to enhance their business using artificial intelligence.

Recurring revenue from artificial intelligence reached 600 million during the past twelve months. So, does this make Workday stock a buying opportunity? I wanted to take a closer look and answer this question by looking at the company’s long-term performance, comparing it and incorporating recent developments, and then looking at the valuation to determine whether this was an attractive stock to buy.

Since 2017, Workday has increased its revenue by approximately 10 times. Over the past twelve months, the company has generated $10.16 billion in revenue, up from about $1 billion 10 years ago.

However, the growth rate is slowing down. The forecast for fiscal year 2028, which is the next fiscal year, has been given a double-digit percentage, around 11%. This would represent a significant slowdown in the compound annual growth rate of the previous decade.

They are enhancing their services with artificial intelligence and dedicated agents. This part of their business is growing rapidly, but it is still relatively small compared to the traditional business, and this is what is putting pressure on the company's long-term growth aspirations.

However, Workday is growing responsibly and wisely, focusing on profitability alongside revenue growth. This has allowed the company to achieve an operating profit margin of 30% over the past twelve months.

Sorry, I should say 30% of the cash flow from operations to sales over the past twelve months. I usually look at the operating profit margin for more mature companies, but for smaller companies or companies that are still in the growth stages, I prefer to look at the cash flow from operations to determine whether it is sustainable.

If a company is generating consistent cash flow from operations at positive and profitable levels, it means it does not have to return to investors and ask for any capital. Furthermore, it gives the company margin and leverage to make strategic decisions to offset some changes in consumer behavior or macroeconomic dynamics.

It gives them the opportunity to make an acquisition if an opportunity arises. It gives them the opportunity to repurchase shares if their share price falls below the levels at which management believes it is wise to sell.

So, all of this makes it a situation where this is a very profitable metric for Workday.

The administration stated that it is developing new AI-powered products and increasing the pace of these investments. Initial indications suggest that their customers appreciate these developments, with over 25,000 dedicated agents being developed at Workday.

Despite these increased investments, Workday's research and development expenditure as a percentage of revenue has fallen significantly. That's a sign that the company is benefiting from economies of scale.

When your revenue grows at a faster rate than your spending on research and development, it creates leverage and expands your profit margins. Workday's R&D to revenue ratio has fallen to 27%, compared to 44% just a few years ago.

Overall, this percentage is still relatively high. I wouldn't be surprised if it fell below 15% over the next five years, and below 10% over the next ten years. Those are the usual metrics for companies in similar industries of a larger scale.

Now that we have looked at the long-term performance metrics and assessed recent developments, I wanted to look at the evaluation. Based on the price-to-earnings ratio, Workday stock is trading at 14.1.

This level is close to the lowest price the stock has reached since late 2023. This stock previously traded at a forward price-to-earnings ratio exceeding 40.

For a company growing in double digits, with expanding margins, investing in AI products and gaining acceptance, a forward price-to-earnings ratio of 14 looks relatively cheap.

I have not yet calculated Workday's discounted cash flow valuation, but just looking at the valuation using the price-to-earnings ratio, the stock appears to be undervalued. To answer the question I posed in the title, does Workday stock look like a buying opportunity?

I would say yes, but I would also say that I have a relatively low level of conviction and a relatively low level of confidence in this purchase rating. One reason is that I have not yet calculated the value of the company's discounted cash flow.

This will make a difference in how I view the company's overall valuation. In addition, this is not a company I follow frequently. Therefore, these two factors lower my confidence level in this purchase rating.