Citi's latest research report favors two enterprise process automation software companies, Appian and Pegasystems, believing that growing demand for AI applications and enterprise automation will drive their business expansion.
Among them, Citi prefers Appian due to its accelerating cloud business growth and improving government orders, maintaining a "Buy" rating and a $40 price target. Citi also maintains a "Buy" rating on Pegasystems but lowered its price target from $55 to $52 to reflect slower short-term sales growth. Based on the October 12 stock price of $34.91, Pegasystems has a potential upside of approximately 49%.
Pegasystems: AI Development Tool Potential Not Yet Fully Reflected in Stock Price
Citi believes that the main issue facing Pegasystems currently is slowing contract growth. The company's second-quarter annual contract value (ACV) grew 8% year-over-year, down from 11% in the first quarter, prompting management to lower its full-year growth target from 15% to approximately 10%. The market is focused on whether this change stems from customers delaying signings and sales process adjustments, or whether it signals a longer-term demand slowdown.
However, Citi believes that investors are underestimating the potential of the company's AI application development tool, Pega Blueprint. Internal tests cited by the firm show that creating a demo application using Pega Blueprint takes only 45 hours, compared to over 2,000 hours required with traditional development methods. Pegasystems is scheduled to release its third-quarter results after the U.S. market close on October 20, with the market focusing on the progress of delayed order signings, full-year sales outlook, and AI product performance.
Appian: Cloud Revenue Up 22%, U.S. Federal Government Orders Hit Record
By comparison, Appian is Citi's more favored pick, primarily benefiting from accelerating cloud business growth and improving U.S. government demand. In the second quarter, Appian's cloud revenue grew 22% year-over-year, and remaining performance obligations expected to be recognized over the next 12 months grew 23%, indicating some support for future revenue.
On the government business front, Citi data shows that in the third quarter, Appian and its partners received a record $60 million in U.S. federal government contract awards, up from $49 million in the same period last year. Since the closing price following the second-quarter earnings report, Appian's stock has risen 28% cumulatively, while the IGV software index gained 12% over the same period.
Despite the stock having clearly outperformed the sector, Citi still believes the market is underestimating the company's potential for sustained cloud business growth and AI product commercialization. Citi maintains a "Buy" rating and $40 price target on Appian, implying approximately 2.7% potential upside compared to the October 12 stock price of $38.93. Appian is expected to report third-quarter results on October 29. Citi will focus on whether cloud revenue growth can remain above 20% and whether sales and marketing investments can continue to translate into revenue growth.
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