Over the last six months, PagerDuty’s shares have sunk to $16.39, producing a disappointing 6.6% loss - a stark contrast to the S&P 500’s 10.3% gain. This may have investors wondering how to approach the situation.
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.
Why Is PagerDuty Not Exciting?
Despite the more favorable entry price, we're sitting this one out for now. Here are three reasons you should be careful with PD 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 $113.8 million in Q1, and over the last four quarters, its year-on-year growth averaged 7%. 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 6.2%, a deceleration versus This projection doesn't excite us and suggests its products and services will see some demand headwinds.
3. Operating Losses Sound the Alarms
While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.
PagerDuty’s expensive cost structure has contributed to an average operating margin of negative 10.2% over the last year. Unprofitable software companies require extra attention because they spend heaps of money to capture market share. As seen in its historically underwhelming revenue performance, this strategy hasn’t worked so far, and 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 isn’t a terrible business, but it doesn’t pass our quality test. After the recent drawdown, the stock trades at 2.9× forward price-to-sales (or $16.39 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. We’d recommend looking at our favorite semiconductor picks and shovels play.
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