TipRanks Smart Value #30: Worth Day

Shrilekha Pethe on September 30, 2025

Dear Investors,

Welcome to the 30^th edition of our recently launched TipRanks Smart Value Newsletter!

This Week’s Top Value Pick: Workday (WDAY)

Workday (WDAY) is a leading provider of cloud-based enterprise applications for finance and human capital management. The company delivers an integrated platform that helps organizations manage financial operations, workforce planning, payroll, talent management, and analytics. Its portfolio includes a suite of applications and data-driven tools designed to streamline business processes, improve decision-making, and enable organizations to adapt quickly in a dynamic environment.

Growth Journey

Workday was founded in 2005 by Dave Duffield and Aneel Bhusri, former executives of PeopleSoft, with a vision to deliver enterprise applications for finance and human resources entirely through the cloud. At a time when on-premises systems dominated, Workday emerged as a pioneer in software-as-a-service (SaaS) for large organizations, offering faster deployment, continuous updates, and a subscription-based model.

The company’s early momentum came from its flagship Human Capital Management (HCM) platform, which appealed to enterprises seeking modern tools for workforce planning, payroll, and talent management. In 2012, Workday went public on the New York Stock Exchange (NYSE), raising funds to accelerate expansion and strengthen its position as a leader in cloud-based HR solutions.

Soon after, Workday broadened its scope with the launch of Financial Management, targeting organizations ready to replace aging ERP systems with cloud-native alternatives. This allowed the company to cross-sell to existing HR clients and expand its addressable market. Over time, the platform evolved into an integrated suite spanning analytics, planning, spend management, and workforce management, enabling enterprises to unify HR and finance operations on a single architecture.

The company’s disciplined expansion has translated into steady earnings growth, supported by high customer retention, multi-year contracts, and a growing international presence. Workday continues to invest heavily in artificial intelligence, machine learning, and low-code automation to stay ahead of competitors such as Oracle and SAP.

Platform Evolution

Over the past decade, Workday has steadily broadened its platform through acquisitions that extended its capabilities in human capital management, finance, analytics, and, more recently, artificial intelligence. These deals reflect the company’s transformation from a cloud-based HR and finance provider into a broader enterprise platform centered on automation, planning, and intelligent employee experiences.

Workday accelerated its expansion with the 2018 purchase of Adaptive Insights for advanced planning tools, followed in 2021 by VNDLY to improve external workforce management and Peakon, a Denmark-based employee engagement platform.

More recently, a sharper focus on AI and automation emerged in 2024. That year, Workday acquired HiredScore, an AI-driven recruiting and talent-ranking solution, and Evisort, a contract management platform specializing in document intelligence. These moves deepened its reach in both recruiting and legal workflow automation, signaling its intent to embed AI more deeply across its suite.

The pace accelerated further in 2025 with three high-profile acquisitions. The acquisition of Sana brought in AI-powered enterprise knowledge and personalized learning tools; Paradox, an AI conversational platform, enhanced frontline recruiting through automation; and Flowise added low-code capabilities that enable customers to design custom AI agents for HR and finance workflows. Together, these deals expanded WDAY’s functionality, enhanced customer engagement, and created new monetization opportunities tied to AI adoption.

By accelerating its M&A activity over the past two years, Workday has positioned itself at the forefront of enterprise AI and intelligent automation. These acquisitions not only broaden the company’s product suite but also address growing customer demand for AI-driven solutions in HR, finance, and workforce management, strengthening its competitive stance against its cloud-native rivals.

Subscription Power

Workday operates a cloud-based SaaS model anchored by its AI-powered platform, which integrates human capital management (HCM), financial management, planning, spend management, and analytics solutions. The company generates the bulk of its revenue from subscription services, which accounted for about 92% of total revenue in the latest quarter. These contracts, typically spanning three years or more, are largely noncancelable and invoiced annually in advance, creating highly predictable and recurring revenue streams. Subscription fees depend on various factors such as the number of employees managed on the platform, the breadth of applications adopted, and contract pricing.

One of the company’s key strengths lies in its ability to expand relationships with existing customers. Its gross revenue retention rate¹ of roughly 97% underscores the stickiness of its platform, while expansions within the installed base consistently account for the majority of new subscription growth. Workday also benefits from a sizable backlog of contracted subscription revenue, which reached $25.4 billion as of July 2025, with nearly $7.9 billion expected to convert within the next 12 months.

In addition to subscriptions, WDAY earns revenue from professional services, including deployment, optimization, and training engagements. These are billed according to either a time-and-materials basis or as a fixed price and represent a smaller share of total revenue. Over time, Workday expects partner firms and system integrators to play a larger role in service delivery, allowing the company to focus resources on expanding its core subscription base.

Looking ahead, the company’s growth is supported by continued innovation in AI integrations, which enhance product functionality and deepens customer engagement.

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1- For subscription-based SaaS companies like Workday, the gross revenue retention (GRR) rate measures how much recurring revenue is retained from existing customers over a given period, excluding any upsells, cross-sells, or expansions.

AI Powerhouse

Artificial intelligence is a central growth catalyst for Workday. Adoption has been rapid for the company’s Illuminate AI platform, with around 75% of customers already using AI features. Illuminate AI integrates HR, finance, and operations data to deliver business insights and automation. Moreover, AI is embedded in 75% of new deals, with roughly 30% linked to customer expansions. To further scale monetization, Workday plans to introduce dedicated pricing models such as Flex Credits starting in 2026. Its AI capabilities have been strengthened by acquisitions and the launch of the Workday Data Cloud and developer platform. The company now supports more than 20 specialized AI agents designed to deliver measurable outcomes while mitigating risks from unproven tools.

The company’s total addressable market is expanding in parallel. TAM has grown from $160 billion in 2024 to $188 billion in 2025, covering HCM, financials, payroll, spend management, planning, talent, and workforce management. Growth is supported by international expansion, penetration of medium-sized enterprises, and industry-specific solutions. Medium enterprises account for more than half of new annual contract value,² with many implementations completed within 60 days via Workday GO, a packaged solution designed for rapid deployment of core HR and finance functionality. Verticals are also contributing meaningfully, with industry-specific solutions generating more than $1 billion in annual recurring revenue,³ while the U.S. federal market alone represents a $2 billion opportunity.

WDAY’s scale and ecosystem create a self-reinforcing growth flywheel. Contracted users have increased from 46 million in fiscal 2020 to over 75 million, while transaction volumes have grown fivefold to more than one trillion annually. Greater platform usage enhances AI capabilities, deepens customer value, and drives further adoption. Workday’s ecosystem, which includes over 1,300 partner firms and strategic acquisitions, further amplifies reach and monetization. Partners contribute over 20% of new annual contract value, have helped launch more than 100 apps, and added $100 million in ARR since fiscal 2024, supported by a global network of 21,000 consultants.

International markets are another significant driver. International revenue is increasing at a rate of roughly 15% annually, reflecting strong demand across Europe and the Asia-Pacific region as enterprises modernize their HR and finance systems with cloud-native platforms. These markets remain underpenetrated compared to the U.S., giving Workday a long runway for adoption and multi-suite expansion.

The company outlined a multi-year strategy at its recent Financial Analyst Day focused on sustaining double-digit growth while expanding profitability. WDAY is targeting 12% to 15% compound annual growth in subscription revenue, supported by cross-sell opportunities, broader AI adoption, and deeper industry penetration. Management expects adjusted operating margins to reach 33% to 36%, reflecting greater scale and AI-driven monetization.

Opportunities remain significant despite the presence of risks such as macroeconomic uncertainty, integration challenges, slower-than-expected AI adoption, and intensifying competition. With its expanding data moat, AI-driven applications, an underpenetrated medium-enterprise segment, international expansion, and partner ecosystem, Workday is positioning itself as a next-generation ERP leader focused on AI-powered business transformation.

Confidence in this trajectory was reinforced when activist investor Elliott Investment Management recently disclosed a stake of more than $2 billion, making it one of Workday’s largest shareholders. Elliott expressed support for management’s strategy and voiced confidence that the multi-year plan outlined at the company’s Financial Analyst Day would deliver long-term value for shareholders.

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2- Annual contract value refers to the annualized value of a contractual agreement for subscription services, excluding one-time fees or services. It represents the revenue a customer commits to paying each year under the subscription portion of a deal.

3- Annualized recurring revenue (ARR) is a key performance metric that represents the annualized value of subscription contracts at a given point in time.

Growth Surge

Workday has delivered strong financial growth in recent years, supported by its subscription-driven business model and ongoing innovation. Over the past three years, revenues have compounded at an annual rate of 16.4%, while EPS has expanded at a much faster pace of 40.4%. This performance reflects the company’s ability to scale its subscription services, diversify across geographies and industries, and maintain disciplined cost management, which has steadily lifted operating margins.

In the second quarter of fiscal 2026, Workday reported revenue of $2.35 billion, up 12.6% year over year and slightly ahead of Wall Street expectations of $2.34 billion. Growth was fueled by subscription services, which rose 14% to $2.17 billion, offsetting a modest 2% decline in professional services revenue to $179 million. Adjusted diluted EPS came in at $2.21, topping analyst estimates of $2.11, with operating efficiency and recurring revenue driving profitability. Adjusted operating margin expanded to 29%, compared to roughly 25% a year earlier, as AI monetization began to contribute meaningfully to results.

Cash generation further highlighted Workday’s financial strength. Operating cash flow rose to $616 million from $571 million in the year-ago period, while free cash flow advanced nearly 14% to $588 million. For the first half of fiscal 2026, free cash flow surpassed $1 billion, representing growth of 25% year over year. The improvement was driven by higher subscription billings and continued cost discipline, underscoring the company’s ability to efficiently convert earnings into cash. Free cash flow per share is projected to grow more than 20% annually, reaching about $15 by fiscal 2028.

Management raised its fiscal 2026 outlook to reflect momentum. Subscription revenue is now expected to be about $8.82 billion, representing 14% growth, while adjusted operating margin is projected at 29%, above analysts’ expectations of 28.5%. Analysts anticipate total revenue of roughly $8.8 billion for the year. For the third quarter, the company forecast subscription revenue of $2.24 billion, or 14.1% growth, with an adjusted operating margin of 28%.

The balance sheet remains conservatively managed, with $8.2 billion in liquidity, including cash and credit facilities. While the company’s debt-to-equity ratio of 0.4 is higher than the sector median, it reflects financing for strategic growth initiatives rather than financial strain. Supported by robust cash flows and healthy liquidity, Workday carries an investment-grade “BBB+” credit rating from S&P Global, underscoring the stability of its capital structure and cash generation profile.

Work-in-Progress

Workday has not introduced a dividend, instead directing capital toward AI investments, acquisitions, and share repurchases. The company’s board approved $1 billion buyback programs in August 2024 and May 2025, with $299 million repurchased in the fiscal second quarter, leaving $1.2 billion authorized as of July 31, 2025. In September, the board added $4 billion, raising total planned repurchases through fiscal 2027 to about $5 billion.

Workday’s stock has been essentially flat over the past year, mirroring broader caution in the enterprise software sector amid macroeconomic uncertainty, questions around AI investment monetization, and heightened competition from Oracle and SAP. As a result of this muted performance, the shares are trading at more than a 30% discount to historical averages across several key valuation metrics, including non-GAAP trailing and forward P/E, forward EV/EBITDA, price-to-book, and price-to-cash flow ratios. Relative to peers such as Salesforce and ServiceNow, the stock also sits at the lower end of the valuation range on non-GAAP trailing and forward P/E ratios, forward EV/EBITDA, and trailing price-to-book and price-to-cash flow measures. Notably, Workday’s non-GAAP forward PEG ratio of 1.02 is the lowest among high-growth SaaS companies, including Salesforce, ServiceNow, and Atlassian. This suggests its shares are attractively priced relative to forward earnings growth compared to competitors.

Wall Street analysts remain positive on Workday, citing its consistent revenue growth as evidence of strong demand for its cloud-based solutions and a solid competitive position. Optimism also centers on the company’s ability to unlock value from its extensive data through AI, achieve balanced momentum across both HCM and financial applications, and continue to expand its international presence.

Consensus estimates imply roughly 14% upside for the stock, with some projecting gains of more than 38% from current levels. Based on a Discounted Cash Flow analysis, WDAY stock is trading at around 26% below its estimated fair value.

Investing Takeaway

For value-oriented investors, Workday presents an appealing case of a market leader trading below its intrinsic worth. Despite muted stock performance over the past year, the company’s fundamentals remain strong, anchored by high customer retention, recurring subscription revenue, and disciplined capital allocation. Its growing scale in both human capital and financial management applications, coupled with investments in artificial intelligence, positions Workday to capture meaningful long-term growth. At the same time, its shares trade at a notable discount compared to historical averages and peer valuations, suggesting that the market has yet to fully recognize its earnings power and competitive moat. With a proven track record of steady expansion, a deep backlog of subscription revenue, and supportive analyst sentiment, Workday offers investors a rare blend of growth potential and value, making it an attractive candidate for those seeking underappreciated opportunities in enterprise software.

Category: Smart Value