Investors were puzzled last week when Workday (WDAY) reported fiscal Q2 2026 results that topped revenue and EPS expectations—yet the stock slid from about $230 to $214. For high-multiple names like WDAY, with a P/E above 100, the reaction reflected not the past quarter, but a forward-looking reassessment of its growth durability.
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On the one hand, WDAY can celebrate a 14% increase in subscription revenue, and the fact that more than 75% of net new deals included one or more AI products, boosted by the recent acquisition of Paradox, an AI-driven recruiting platform.
However, on the other hand, Workday faced headwinds in the state and local government market due to anticipated funding slowdowns, which impacted the SLED segment. Meanwhile, higher education institutions, especially those with healthcare systems, are facing funding pressures, thereby casting a shadow on WDAY’s core market offering.
It would seem that simply meeting forecasts is no longer enough to support the lofty valuations SaaS stocks once enjoyed, warranting a cautiously Neutral stance as Workday navigates a choppy market environment.
Strong Quarter at First Glance Only
For those not aware, Workday provides cloud applications for finance and human resources. The company’s revenue can be broken down into two categories: Professional (one-time revenue from services that help customers utilize the platform) and “Subscription” (recurring fees for access to cloud-based software applications).
In FQ2, revenue rose 12.6% year-over-year to $2.35 billion. Earnings were even stronger, with adjusted diluted EPS climbing 26% to $2.21. Meanwhile, Workday’s 12-month subscription backlog, or current Remaining Performance Obligations, expanded 16.4% to $25.37 billion.
Tepid Guidance Hits WDAY Hard
So, what went wrong? The market’s concern centered on Workday’s Q3 guidance. Projected subscription revenue of about $2.24 billion came only ‘in line’ with consensus—effectively a disappointment in the software world, where investors expect a consistent beat and raise.
Adding to skepticism, Workday technically raised full-year subscription guidance from $8.8 billion to $8.815 billion. But that $15 million bump reflects its acquisition of Paradox, a conversational AI firm. Stripping out the deal, organic guidance was essentially unchanged—signaling limited momentum in the core business.
Slowed Government Spending Invites Headwinds
During the earnings call, WDAY’s management highlighted headwinds in the state and local government (SLED) sector due to funding uncertainties, with similar pressures affecting the higher education market. Compared with other SaaS peers, Workday is more exposed to government-related budget constraints. Investors also worry that SLED weakness could serve as a proxy for broader macroeconomic challenges that may spill over into the corporate sector.
The Double-Edged Sword of AI
For many SaaS companies, artificial intelligence has become a double-edged sword—viewed by investors as either an existential threat or a growth engine. In Workday’s case, both narratives apply. The company is steadily embedding AI into its offerings, noting that 75% of new customer deals and 30% of expansion deals with existing clients included at least one AI product. Alongside its Paradox acquisition, Workday further bolstered its AI toolkit this month by acquiring Flowise, a low-code AI agent builder.
The risk, however, is that AI could make software obsolete. If a single AI agent can handle tasks like resume screening or financial summaries—functions once requiring multiple employees—enterprises may need fewer employees. Workday is working to define itself as a leader in this new paradigm rather than a casualty. Based on recent hedge fund positioning, institutional investors seem to be leaning toward the more optimistic view.
Despite the topsy-turvy sentiment surrounding WDAY, the smart institutional money seems to like the stock. According to TipRanks’ hedge fund tracker, WDAY is currently seen with high confidence by hedge fund managers on Wall Street.
According to 13F filings from 487 hedge funds submitted to the U.S. SEC throughout 2024 and 2025, hedge fund managers have raised their collective stake from around 10 million shares in January 2024 to around 15 million today. The current Confidence Signal based on 29 leading hedge funds is Positive.
What is the Target Price for WDAY Stock?
On Wall Street, WDAY sports a consensus Moderate Buy rating based on 21 Buy, seven Hold, and one Sell rating in the past three months. WDAY’s average stock price target of $279.96 implies an upside potential of 23.5% over the next twelve months.
Following its FQ2 2026 earnings results, Citi (C) analyst Steven Enders lowered his price target on WDAY from $279 to $260 while maintaining a Hold rating. He cited uncertainty regarding the “reasons for the second half outlook cut” and is “cautious about the upcoming analyst day,” which is scheduled for September 16th.
Workday’s Premium Valuation Hinges on its AI Narrative
Workday’s post-earnings selloff, despite strong topline results, reflects sky-high expectations. Guidance pointed to some organic slowdown as macro pressures weigh on clients, and the company now faces the challenge of proving its AI investments can be monetized to re-accelerate growth. As Citi (C) analysts recently noted, the risk around Workday has shifted from quarterly earnings to the broader narrative dividing AI’s ‘haves’ and ‘have-nots.’ How well Workday shapes that narrative may ultimately determine whether it can sustain its premium valuation.