Why Workday stock fell 14% today

HR software manufacturer stocks working day (WDAY -15.19%) Despite beating expectations in the company’s first quarter 2024 earnings report Thursday night, it was down 13.8% as of 11:40 a.m. ET on Friday.

On the revenue side, analysts forecast Workday to post revenue of $1.97 billion and earnings of $1.58 per share. The company beat sales forecasts by a wide margin with revenue of $1.99 billion and posted earnings of $1.74 per share, well ahead of estimates.

Workday first quarter earnings

But not all the news was good. Sales for the quarter were up 18.1% year-over-year, with subscription revenue growing an even bigger 18.8%. But Workday’s earnings were both bad news and good news.

The bad news: Earnings of $1.74 per share were adjusted. Using generally accepted accounting principles (GAAP), the company actually earned only $0.40 per share.

Good news: Even $0.40 is a lot better than the $0.00 you earned in Q1 2023.

Is Workday stock a sell?

What actually surprised investors was that Workday’s subscription backlog increased only 17.9%. This suggests that revenue growth may slow in the future. Confirming these suspicions, management warned that subscription revenue this year would only increase 17%, to about $7.7 billion, and that subscription revenue growth in the second quarter would be only 17%, or $1.9 billion.

If correct, this would be slightly less than Wall Street had expected. Not a good look for a growth stock. In short, this is why Workday stock prices are plummeting. But should investors sell?

Not necessarily. Workday stock is valued at 50 times trailing earnings, but 34.5 times free cash flow. And long-term forecasts suggest the stock is expected to grow its earnings by about 20% per year over the next five years.

This is not a cheap valuation at all, which is why slowing growth can have a big impact on the stock price. But Workday isn’t overvalued right now. And if the stock price falls any further, you can buy it.