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PagerDuty: A Compelling Digital Operations Platform
Stock Analysis & Ideas

PagerDuty: A Compelling Digital Operations Platform

PagerDuty (PD) is a digital operations management platform that allows people to make the right decisions and choose the right action in situations when every second counts. I am neutral on PD stock.

The company’s platform includes PagerDuty’s auto-remediation software, which the company claims is one of the best ways to handle urgent, mission-critical work and maintain digital services always online.

PagerDuty’s platform collects data from effectively any software-enabled system or device and merges it with human response data correlating and processing it to comprehend digital possibilities and issues that need to be addressed in real-time.

Great Growth Prospects 

PagerDuty’s market-leading position in the digital operations management space is illustrated in its extensive customer list, which includes 65% of the Fortune 100 and 45% of the Fortune 500 companies.

As you can imagine, the company is growing rapidly, with its most recent Q3 results delivering strong numbers. PagerDuty posted record revenues of $71.8 million, a 33.5% increase year-over-year.

The company’s product innovation continued to accelerate across use cases, and departments with PagerDuty’s total paid customers reached 14,486 by the end of October, versus 13,725 in the prior-year period.

Customers with annual recurring revenue of over $100,000 also grew from 401 to 543 year-over-year, which showcases the platform’s scalability and prospects to upsell multiple features on top of the basic components. The company’s dollar-based net retention rate of 124% compared to 119% in the year-ago period also highlights this point.

Note that while the company features a gross margin of around 85%, which suggests that its long-term profitability prospects are rich, PagerDuty remains unprofitable. This is primarily due to high R&D and marketing expenses, which makes sense since the company is still in its early growth phase.

However, the company’s bottom line is also heavily weighted down from stock-based compensation expenses (a non-cash item). Specifically, in Q3, stock-based compensation expenses amounted to $17.8 million, which is nearly 1/4 of revenues.

On the one hand, stock-based comp is vital for the company to retain top talent. That said, investors should be wary of the perhaps rapid dilution pace. My point, however, is that excluding these and other non-cash expenses (e.g., depreciation), the company is actually delivering positive operating cash flows.

The company expects total revenues of $75.5 million to $76.5 million in its upcoming earnings, representing a 27%-29% year-over-year growth rate.

Wall Street’s Take

Turning to Wall Street, PagerDuty has a Strong Buy consensus rating, based on six Buys and one Hold assigned in the past three months. At $57.64, the average PagerDuty price target implies 80.63% upside potential.

Conclusion

In my view, PagerDuty is a promising company that clearly demonstrated its ability to deliver rapid revenue growth, robust retention rates, and attract high-quality customers.

Based on its current growth pace, I find the stock rather attractively priced at its current price-to-sales multiple of around 10 (PD expects Fiscal 2021 revenues of $278.5 million to $279.5 million).

However, because the company is likely to be burning lots of cash as it continues to scale, I will stay neutral on the stock until the trajectory of reaching a GAAP-positive bottom line becomes clearer.

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