AI Automation Will Undermine Premium Pricing Amid Rising Competition

Key Takeaways

• Growing use of AI automation and open-source tools threatens PagerDuty's pricing power, market size, and customer retention.
  
• Competitive, regulatory, and economic pressures are squeezing margins and restricting future revenue and earnings growth.
  
• Investments in AI-driven innovation, focus on enterprise customers, and operational discipline are strengthening PagerDuty's recurring revenue quality, international growth, and long-term profitability.

Catalysts

Engages in the operation of a digital operations management platform in the United States and internationally.

• The accelerating adoption of AI-powered automation across IT operations is likely to commoditize incident response and real-time operations management, putting downward pressure on PagerDuty's pricing power and shrinking its core addressable market, which would cause future revenue growth to slow dramatically.
  
• The trend towards open-source incident management tools and widespread adoption of customer-built automation scripts is intensifying, making it increasingly difficult for PagerDuty to justify premium pricing and retain enterprise customers, resulting in rising customer churn and stagnant or negative net dollar retention.
  
• As macroeconomic headwinds persist and technology budgets remain under scrutiny, many organizations will prioritize reducing operational spend, leading to continued seat downgrades, deferred expansions, and heightened retention risk among PagerDuty's existing customers, which will restrict both top-line revenue and ARR growth.
  
• Regulatory requirements and data localization demands are expected to increase compliance costs and introduce greater complexity for SaaS vendors operating in multinational markets, worsening PagerDuty's margin profile and reducing the company's ability to deliver meaningful long-term earnings improvement.
  
• Intensifying competition from integrated DevOps/cloud platforms and the risk of industry consolidation will erode PagerDuty's market position as larger vendors subsume PagerDuty's core features, directly impacting PagerDuty's ability to maintain customer growth or expand margins, and leading to prolonged earnings stagnation.

PagerDuty Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on PagerDuty compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming PagerDuty's revenue will grow by 6.0% annually over the next 3 years.
• The bearish analysts are not forecasting that PagerDuty will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate PagerDuty's profit margin will increase from -2.9% to the average US Software industry of 12.9% in 3 years.
• If PagerDuty's profit margin were to converge on the industry average, you could expect earnings to reach $74.2 million (and earnings per share of $0.8) by about September 2028, up from $-13.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 26.1x on those 2028 earnings, up from -110.6x today. This future PE is lower than the current PE for the US Software industry at 35.8x.
• Analysts expect the number of shares outstanding to grow by 0.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.14%, as per the Simply Wall St company report.

PagerDuty Future Earnings Per Share Growth

Risks

• The accelerating adoption of AI, increased digital complexity, and the expansion of cloud and multi-cloud environments across industries continue to drive strong demand for real-time incident response and operations management platforms, supporting long-term revenue growth for PagerDuty.
  
• PagerDuty's ongoing investment in AI-enabled automation, usage-based pricing, and product innovation-including the successful launch of AIOps, generative AI agents, and workflow orchestration-enhances upselling, cross-selling, and customer retention, which could lead to expanding average revenue per customer and improved margins over the long term.
  
• A substantial portion of PagerDuty's annual recurring revenue now comes from large enterprise customers and multi-year contracts, shifting the ARR base toward higher quality, less volatile sources and supporting more stable recurring revenue and future profitability.
  
• The company's strong international growth, expansion of high-value customer accounts, and position as a mission-critical platform for highly regulated industries (such as telecommunications and finance) demonstrate durable demand drivers that could mitigate potential macroeconomic or competitive pressures on revenue and earnings.
  
• PagerDuty has achieved its first quarter of GAAP profitability while expanding operating and free cash flow margins, indicating improved operational efficiency, disciplined capital allocation, and a sustainable financial model, which are all factors that can support future increases in earnings and shareholder value.

Valuation

• The assumed bearish price target for PagerDuty is $16.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of PagerDuty's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $23.0, and the most bearish reporting a price target of just $16.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $576.0 million, earnings will come to $74.2 million, and it would be trading on a PE ratio of 26.1x, assuming you use a discount rate of 9.1%.
  
• Given the current share price of $16.47, the bearish analyst price target of $16.0 is 2.9% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.