AI Ambitions Could Turn This Stock Pullback into a Setup for the Next Leg Higher

AI Ambitions Could Turn This Stock Pullback into a Setup for the Next Leg Higher

Workday Inc. (NASDAQ: WDAY) has long been a leader in financial and human capital management software. After a sharp 12.5 percent drop following fiscal Q1 earnings in May, the stock is trading near $222, down almost 12 percent year to date. 

The pullback was driven by cautious Q2 guidance, yet the company continues to post solid growth, expand margins, and double down on artificial intelligence capabilities. For investors looking to gain exposure to enterprise AI adoption, this could be a moment to start building a position. This might be a stock to get ahead on before earnings next week on August 21, 2025.

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Strategic Positioning: AI at the Core of HR and Finance Software

Workday’s platform is deeply embedded in some of the most important business processes for over 11,000 organizations worldwide, including more than 60 percent of the Fortune 500. Its subscription-based model delivers recurring revenue from products that handle payroll, benefits, talent management, and financial planning.

The company is now moving to make AI an integral part of this ecosystem. The recent acquisition of Flowise, a low-code platform for building AI agents, will allow customers and partners to quickly develop and deploy AI-driven workflows for HR and finance.

Flowise’s technology supports the entire development process from prototyping to analytics, making it easier for enterprises to customize AI solutions without deep technical expertise.

Workday also launched the Workday Agent Partner Network, collaborating with companies like Accenture, Adobe, and Microsoft to integrate AI agents across systems. With agentic AI expected to reshape how organizations handle routine tasks, Workday’s early positioning could translate into higher customer retention and expansion rates.

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Momentum Drivers: Backlog Strength and Margin Expansion

Fiscal Q1 results showed revenue up 12.6 percent year over year to $2.24 billion, with subscription revenue climbing 13.4 percent to $2.06 billion. Adjusted earnings per share rose 28 percent to $2.23, beating consensus estimates. 

AI is already contributing meaningfully, with 25 percent of customer expansions including at least one AI product and AI-related annual contract value more than doubling from last year.

Workday’s subscription backlog is another sign of underlying strength. The 12-month subscription backlog rose 15.6 percent to $7.63 billion, while the total backlog jumped 19 percent to $24.62 billion. These metrics suggest that management’s guidance for a slight acceleration in subscription revenue growth in the back half of the year may prove conservative.

Operating margins are expanding as the company gains scale. The Q1 adjusted operating margin was 28 percent, up from 25.9 percent a year ago. Management has raised its full-year margin forecast to 28.5 percent, underscoring the efficiency gains from its maturing business model.

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Valuation: Premium Supported by Quality

At a forward price-to-sales multiple of roughly 6.7 and a forward P/E near 27, Workday trades at a discount to its historical averages, even as gross margins remain above 75 percent. 

The company has $8 billion in cash and marketable securities against $3 billion in debt, giving it flexibility for buybacks, acquisitions, and continued investment in AI.

Free cash flow in Q1 was $421 million, up 44 percent from last year, more than enough to fund share repurchases that offset dilution from stock-based compensation. 

With 90 percent institutional ownership and significant positions from firms like T. Rowe Price, BlackRock, and Bank of America, Workday’s shareholder base provides long-term stability.

Technicals: Testing Support in the Low $220s

The stock is now trading just above its 52-week low of $205.33. This area has acted as long-term support since 2020, with buyers stepping in each time shares dip below $210. Volume has picked up on recent down days, but if institutions view this pullback as a buying opportunity, the stock could quickly recover toward the $240–$250 range.

Key levels to watch:

• Support: $205 (major long-term floor)

• Resistance: $235 (short-term) and $250 (gap-fill target)

• Breakout Level: $265 on volume for a trend reversal confirmation

Risks to Monitor

While the long-term thesis is intact, several factors could limit near-term upside:

• Economic Sensitivity: A slowdown in enterprise software spending could impact new deal flow and expansions.
  

• Competitive Landscape: Microsoft, Oracle, and SAP are all investing heavily in AI for HR and finance, increasing competitive pressure.
  

• Execution Risk in AI: Integrating Flowise and scaling AI agents across the customer base will require careful execution to maintain trust and adoption rates.
  

• Valuation Compression: Even after the pullback, Workday trades at a premium to some enterprise software peers, leaving it vulnerable to multiple contraction if growth slows.

Final Word: Quality Platform Positioned for the Next AI Wave

Workday’s combination of a sticky subscription base, growing AI capabilities, strong balance sheet, and expanding margins makes it one of the more compelling large-cap software names in the market. 

The Flowise acquisition and broader AI agent strategy could materially enhance its value proposition over the next two to three years.

The recent sell-off reflects caution, not weakness. With a proven track record of beating estimates, a growing backlog, and substantial institutional support, Workday has the potential to surprise to the upside in the second half of 2025. 

For investors with a long-term horizon, this is a stock worth watching closely.