PagerDuty: A Digital Ops Stock to Watch

PagerDuty (PD) is an international company which provides a platform as a service for customers to manage digital operations. The company’s platform acts like a “central nervous” system by directing incident responses and on-call personnel, among several other functions.

The company is the brainchild of former Amazon (AMZN) software engineers. The engineers were on-call, or as they called it, “Pager Duty” to handle incidents as they arose many years ago at Amazon. They determined that there was both a need in the marketplace and a better way to handle digital operations, and PagerDuty was born. The company has been public since April 2019.

I am bullish on PD stock. (See Analysts’ Top Stocks on TipRanks)

Key Metrics Are Positive

Customer growth is a key metric for all platform-as-a-service (PaaS) companies and PagerDuty is no exception. As of April 30, 2019, PagerDuty had 11,600 customers. As of July 31, 2021, over 18,000 companies were using PagerDuty according to the company’s earnings presentation. This represents an impressive 55% increase in just over two years.

Customers who provide over $100,000 in annual recurring revenues are also increasing steadily. At last report this growth reached 36% year-over-year. Customers who provide over $1 million in annual revenues increased 63% year-over-year.

These large customers are the key to profitability and future outperformance, making these increases highly encouraging. The customer base includes more than 65% of the Fortune 100. The company also has a net retention rate of 126%. This means that current customers are expanding use of PagerDuty and providing increasing amounts of revenue each period.

Revenue has risen each quarter since the company went public. For the quarter ended July 31, 2019, PagerDuty produced $40.4 million in revenue. This rose to $67.5 million for the same period in 2021. This is an impressive, but not outstanding, 29% compound annual growth rate.

The company spends most of this revenue on sales and marketing expenses each quarter. The company is in growth mode and investors should not expect GAAP profits for several years.

PagerDuty has a quality gross profit margin of over 80% which implies that the business model is highly scalable. Long-term debt rose to $280 million at last report. This number is not prohibitive at this point, however it bears watching as it has been rising steadily since July 2020. International expansion is also a focus of management at this time. In Q2 FY22, just 25% of revenue came from overseas making this a fertile area for growth.

PagerDuty Valuation

PagerDuty stock has not enjoyed the run that many growing technology have since going public. In fact, the stock is down 21.6% since its IPO.

It is also near its 52-week low of $30.32 and well off its 52-week high of $58.36. This may represent an opportunity for investors. The forward P/S ratio is 8.6x.

This is fairly high, however nowhere near the multiples that are sometimes seen for growth stocks in this market. The recent downswing has allowed the metrics to catch up to the price.

Wall Street’s Take

Over on Wall Street, analysts have a Moderate Buy consensus rating on PagerDuty. This is based on two Buy ratings.

The average PagerDuty price target of $66 implies 113% upside from the current price.

Conclusion

PagerDuty is an innovative company in the digital operations space. It boasts many of the world’s largest companies as its customers. Revenues have increased every quarter since the company went public.

The stock has floundered since the IPO and remains down near 52-week lows. The stock is not well known at this time, so investors should consider keeping a close eye on upcoming results. Accelerated growth could prove to be the catalyst for this stock to finally break out.

Disclosure: At the time of publication, Bradley Guichard had a position in securities mentioned in this article.