Even though PagerDuty (currently trading at $16.48 per share) has gained 7.4% over the last six months, it has lagged the S&P 500’s 27.9% return during that period. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
Is there a buying opportunity in PagerDuty, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free for active Edge members.
Why Is PagerDuty Not Exciting?
We're sitting this one out for now. Here are three reasons why PD doesn't excite us and a stock we'd rather own.
1. Weak Billings Point to Soft Demand
Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.
PagerDuty’s billings came in at $113.6 million in Q2, and over the last four quarters, its year-on-year growth averaged 5.9%. This performance was underwhelming and suggests that increasing competition is causing challenges in acquiring/retaining customers. 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect PagerDuty’s revenue to rise by 5.8%, a deceleration versus its 20.6% annualized growth for the past five years. This projection doesn't excite us and indicates its products and services will see some demand headwinds.
3. Operating Losses Sound the Alarms
Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.
Although PagerDuty was profitable this quarter from an operational perspective, it’s generally struggled over a longer time period. Its expensive cost structure has contributed to an average operating margin of negative 5.9% over the last year. Unprofitable, high-growth software companies require extra attention because they spend heaps of money to capture market share. As seen in its fast historical revenue growth, this strategy seems to have worked so far, but it’s unclear what would happen if PagerDuty reeled back its investments. Wall Street seems to think it will face some obstacles, and we tend to agree.
Final Judgment
PagerDuty’s business quality ultimately falls short of our standards. With its shares underperforming the market lately, the stock trades at 3× forward price-to-sales (or $16.48 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are superior stocks to buy right now. Let us point you toward a safe-and-steady industrials business benefiting from an upgrade cycle.
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