Workday: Another AI Winner Melting-Up

Key Points

• Workday is experiencing an AI-driven melt-up. 
• The Q1 results and guidance are promising and support the rally. 
• The analysts liked the results and raised their price targets: a move above critical resistance will bring new all-time highs into play. 

A melt-up is happening in the tech market, and Workday NASDAQ: WDAY is among the early winners. The melt-up is driven by artificial intelligence (AI) and has already produced spectacular gains for companies like NVDA NASDAQ: NVDA, Advanced Micro Devices NASDAQ: AMD, Marvell Technology NASDAQ: MRVL and even Workday. If you’re thinking, Workday has nothing in common with the chip makers, you are right. The thing in common is AI and Workday is well-positioned to be long-term leader in the space. 

"Workday had a strong first quarter, underscoring the value proposition of the full Workday platform combined with our unique approach to artificial intelligence and machine learning," said Aneel Bhusri, co-founder, co-CEO, and chair, of Workday.

While chip makers will see the earliest boom, AI services will see a larger and more sustained boom and eventually become the market's largest segment. What this means for Workday investors is an AI-driven melt-up now and then a sustained uptrend later. There will be some volatility between now and then, so investors should not chase prices but wait for pullbacks to buy into the stock. 

Workday Works Out Another Winning Quarter 

Workday had a good quarter, but the guidance got the market moving. The company’s $1.68 billion in revenue is up 17.5% compared to last year and beat by $0.010 billion, but the guidance is even better. The guidance assumes a slowdown in subscription revenue growth to 18% compared to the Q1 20.1%, but this is well above expectations and driven by an increase in large and long-term clients. The subscription backlog, an indicator of future revenue, grew by 31.6%, with 24-month subs up nearly 23%. 

The margin news is also good. The company reported a GAAP operating margin of -1.2% with EPS of $0.00, bettering a loss posted in the previous year. The adjusted operating margin improved by 340 basis points to 23.5% and delivered EPS of $1.31, more than double the previous year and $0.19 better than expected. The takeaway is that revenue and margin guidance is better than expected and is driving a significant reevaluation of the stock. 

The company has 29 analysts with current ratings on Marketbeat’s analysts-tracking page, so the analysts' sentiment is a powerful driver for this market. The analysts have the stock pegged at a Moderate Buy, and at least 14 of them raised their price targets following the Q1 release. The activity has the consensus figure trending higher after hitting the bottom last quarter and moving upward quickly. The bulk of new targets is in the range of $240 to $260 compared to the $223 consensus figure, which is only a few hundred bps above the current price action. The $240 target offers an 11% upside; the consensus figure should be expected to trend higher over the year. 

Institutions Help Workday Bottom

The price action in Workday hit a low in 2022 due to heavy amounts of institutional selling that ceased in 2023. The institutions have been buying since the first of the year, if lightly and have helped the market to rally up to this point. The guidance should keep them in the market, assuming this is so the stock should continue to trend higher in the near term. 

The chart favors higher share prices and may result in some rapid action, including the potential for price gaps. This could result in day-to-day volatility, and there is a chance that resistance will cap gains. The critical point is near $220; if the market can get above that level, it could retest the all-time high.