What a fantastic six months it’s been for PagerDuty. Shares of the company have skyrocketed 165%, hitting $16.06. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy PagerDuty, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think PagerDuty Will Underperform?
We’re glad investors have benefited from the price increase, but we don’t have much confidence in PagerDuty. Here are three reasons we avoid PD, plus one 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 $117.1 million in Q2, and over the last four quarters, its year-on-year growth averaged 1.1%. 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 1.1%, a deceleration versus its 15.2% annualized growth for the past five years. This projection doesn’t excite us and suggests its products and services will see some demand headwinds.
3. Cash Flow Margin Set to Decline
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Over the next year, analysts predict PagerDuty’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 23.7% for the last 12 months will decrease to 22.1%.
Final Judgment
PagerDuty falls short of our quality standards. After the recent surge, the stock trades at 2.6× forward price-to-sales (or $16.06 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are more exciting stocks to buy at the moment. Let us point you toward an all-weather company that owns household favorite Taco Bell.
Stocks We Would Buy Instead of PagerDuty
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