PagerDuty: Current Share Price Is An Attractive Entry Point

seekingalpha10-01

The slowdown in PagerDuty's revenue growth is attributed to macroeconomic conditions, not structural issues.PD's strategic pivot to focus on enterprise accounts is promising, with strong execution ...

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Maskot Summary A brief update from my last coverage on PagerDuty (NYSE:PD). I rated a buy rating in July this year, and my key thesis was that PD offers a strong value proposition to businesses, and it should see growth accelerate once the macro environment gets better. My view for PD has gotten even more bullish today as the feds have cut rates, and the focus on enterprise is the right strategy that I am positive about. The recent share price drop is not a big concern for me; in fact, it has made the entry point more attractive. Share price sell-off is due to macro reason Since my initiation, PD share price has fallen by ~20% (from ~$22 to ~$18 today). Although the share price moved in the opposite direction vs. what I expected, I believe this has provided investors with an attractive entry point because the decline was not due to structural reasons. In my opinion, the selloff was because PD reported poor revenue growth and management cut its FY25 guidance. Specifically, 2Q25 revenue grew only by 8% to $116 million, and management guidance for 3Q25 revenue growth is 6 to 8%, implying more deceleration in the near term. Accordingly, they cut the midpoint of the FY25 revenue guide by ~$9 million to $463 to $467 million. Given that the PD equity story is anchored largely to “growth” as the TAM is huge, I can imagine why the slowdown in growth is concerning, and hence the sharp selloff in the share price. However, I believe the market is overly punishing PD, as the slowdown was due to macro factors, and that PD is actually executing really well, positioning itself for growth inflection in the coming months when the macro conditions get better. Specifically, the still-elevated rates environment (vs. pre-covid levels) continues to have a heavy impact on small-and-medium businesses [SMB] and delays the enterprise sales cycle. But, my view is that the macro condition is going to get better from here as the Feds have cut rates and have signaled to cut by another 50 bps in November. Importantly, these rates cut and expectations are not reflected in the 2Q25 results and management guidance (room for upside surprise). Structural tailwinds remain intact, and management is executing The reality today is that demand for cybersecurity remains a top priority for businesses, and multiple recent surveys support this claim. For instance, this Gartner survey found that 88% of chief information officers are boosting cybersecurity spending, and this IoT Analytic survey showed cybersecurity remains a top priority. The recent CrowdStrike incident that caused a major global outage has also amplified the need for businesses to take a more automated approach to incident management, and this is especially for large enterprises. With this view, I believe management did the right thing in pivoting the business to focus on enterprise accounts. While this pivot also means lesser resources are being allocated to driving growth at the SMB level, the way I see it, this is a short-term pain but long-term positive type of situation. I like the focus on enterprise accounts because: (1) they have a larger need for automation since there are more aspects to monitor; (2) they have more financial capacity to invest (deal size is larger); and (3) they are more resilient (lesser churn profile). Encouragingly, PD execution on this front so far has been very promising, where the number of >$500k spending accounts grew by >20% in 2Q25 and the enterprise-dollar-based net retention rate [DBNRR] was 10% higher than SMB. Viewed from another perspective, despite the poor revenue performance and pressure seen at the SMB level (which are headwinds to annual recurring revenue [ARR] growth), 2Q25 ARR y/y growth stabilized at ~10% for the 3rd straight quarter, and the net-new ARR growth accelerated y/y. Assuming the SMB ARR contribution is negative, we can infer that the enterprise ARR contribution is at very positive levels. Other data points that suggest PD is gaining strong traction are the strong momentum seen in multi-year/product deals and several six- and seven-figure deals in 2Q25.   Source: Author's calculation Looking ahead, with rates coming down and PD pivoting themselves to focus on enterprise accounts (which is working), I believe ARR growth will see a growth acceleration for the rest of the year and a massive acceleration in FY26. Note that management guided for ARR growth acceleration in 2H25, with ARR exiting FY25 with >10% y/y growth - this sets a baseline to think about FY25 growth. Given that this guide was announced in early September (about 5 weeks of 3Q25 data), I believe management must have seen very positive quarter-to-date data for them to guide this way. Moreover, PD now has more resources available to allocate for growth (i.e., capture new logos and up/cross-sell customers) as it has lapped the major renewal cycle in 2Q25 - around one-third of ARR available-to-renew were multi-year deals that, naturally, required PD to allocate its sales rep to renew the deals. The timing of inflection is hard to pinpoint because the conversion of enterprise deals to revenue may take longer than expected because the deal size is larger and is also more complex (enterprises need more requirements and customizations). But if we look at historical trends, ARR y/y growth has had a very strong relationship with revenue growth. Hence, my view is that PD is going to see revenue accelerate at some point in FY25, and that is going to be a major catalyst for the stock price to go up. Valuation   Source: Author's calculation I believe the upside has gotten a lot more attractive after the drop in share price, and even if I adjust for the revenue guide down for FY25 (from 10% to 8%). The core assumption here is that revenue will accelerate in FY26 and beyond, which, I think, is very likely, as I have discussed above. I think 15% y/y growth in FY26 is doable, since management is looking to exit FY25 with >10% in ARR growth. Assuming the acceleration trend persists throughout FY25, ARR growth (and consequently revenue growth) should exit FY26 at high teens, averaging out the year at mid-teens growth. The final piece of the puzzle is what multiple should PD trade at. The last time PD grew mid-teens to ~20% was last year, and if we assume that PD trades back to FY24 levels, which is an average of ~4.5x, the stock could trade up to a share price of ~$33, representing ~76% upside. Investment Risk The market apparently focused on PD’s near-term growth outlook, and there is potential for growth to further slow from here if PD significantly ramps up its focus to acquire new enterprise logos. While I see this as a positive for the long term, this could lead to pockets of major growth slowdown as SMB stays weak (PD not focusing on this) and large enterprise deals take longer time to close and convert from pipeline to revenue. Conclusion  While the near-term slowdown in growth looks bad on the headline basis, I believe it is due to macro factors and nothing structural. My view is that PD's strategic pivot towards enterprise accounts and strong execution will ultimately drive significant growth acceleration. With that view, I believe the current valuation is cheap, as the last time PD grew at mid-teens to ~20% level, the stock traded at ~4.5x forward revenue.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.28.3","shortVersion":"4.28.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2472531789"}