Over the last six months, PagerDuty’s shares have sunk to $13.03, producing a disappointing 9.8% loss - a stark contrast to the S&P 500’s 13.3% gain. This was partly due to its softer quarterly results and 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 for active Edge members.

Why Is PagerDuty Not Exciting?

Despite the more favorable entry price, 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 $117.7 million in Q3, and over the last four quarters, its year-on-year growth averaged 3.8%. 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 2.8%, a deceleration versus its 19.6% annualized growth for the past five years. This projection doesn't excite us and implies 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 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 2.1% 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. Following the recent decline, the stock trades at 2.4× forward price-to-sales (or $13.03 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at the Amazon and PayPal of Latin America.

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