AI And Automation Expansion Will Drive Future Adoption And Efficiency

Key Takeaways

• Strategic shifts towards multiyear platform partnerships and enhanced sales models are expected to drive revenue growth and improve margins.
  
• New AI monetization strategies and a share repurchase program signal confidence in financial position, potentially boosting revenue and earnings.
  
• The shift to enterprise sales and leadership changes may cause execution challenges, revenue pressure, and instability, potentially affecting revenue targets and growth.

Catalysts

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

• PagerDuty's strategic shift towards multiyear, multiproduct platform partnerships is expected to enhance enterprise traction, increasing revenue through higher ARR from large accounts.
  
• The company's focus on optimizing sales efficiency, transformation towards an enterprise sales model, and hiring strategic reps are expected to positively impact net margins by improving sales productivity and effectiveness.
  
• New platform monetization strategies, including AI capabilities and a frictionless packaging structure, are poised to differentiate PagerDuty in the market, potentially boosting revenue and earnings as these innovations align with customer needs for enhanced automation and operational efficiency.
  
• The democratization of access to PagerDuty's AI and automation capabilities across all paid tiers is likely to drive increased adoption and usage, potentially leading to higher revenue and improved net margins due to the scalable nature of the platform.
  
• A $150 million share repurchase program demonstrates confidence in PagerDuty's financial position and free cash flow durability, signaling potential EPS growth through the reduction of outstanding shares.

PagerDuty Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming PagerDuty's revenue will grow by 8.0% annually over the next 3 years.
• 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 -11.6% to the average US Software industry of 12.0% in 3 years.
• If PagerDuty's profit margin were to converge on the industry average, you could expect earnings to reach $70.5 million (and earnings per share of $0.9) by about March 2028, up from $-54.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.0x on those 2028 earnings, up from -32.8x today. This future PE is lower than the current PE for the US Software industry at 29.5x.
• Analysts expect the number of shares outstanding to decline by 4.72% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.09%, as per the Simply Wall St company report.

PagerDuty Future Earnings Per Share Growth

Risks

• The transition to an enterprise-focused, top-down sales strategy and the transformation of go-to-market practices could face challenges in execution, which may result in near-term pressure on revenue growth if not managed effectively.
  
• The recent leadership changes and continued search for a Chief Revenue Officer might lead to organizational instability, impacting sales efficiency and possibly affecting net margins.
  
• The go-to-market execution shortfall in FY 2025 highlights potential vulnerabilities in achieving revenue targets, indicating that revenue performance may again fall short of expectations.
  
• Macro environment uncertainty and changing customer buying behavior, with a focus on efficiency and top-down sales, could impact enterprise spending and lead to slower growth in bookings and revenue.
  
• Dependence on upselling and cross-selling to large enterprise customers and the need for transformative deals could lead to uneven revenue contributions and pressure on net income if these deals do not materialize as expected.

Valuation

• The analysts have a consensus price target of $20.727 for PagerDuty based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $26.0, and the most bearish reporting a price target of just $18.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $589.2 million, earnings will come to $70.5 million, and it would be trading on a PE ratio of 29.0x, assuming you use a discount rate of 8.1%.
• Given the current share price of $19.6, the analyst price target of $20.73 is 5.4% higher. The relatively low difference between the current share price and the analyst consensus 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.