Pegasystems (PEGA): Evaluating Valuation After Cloud Backlog Surge and AI-Driven Subscription Growth

Pegasystems (PEGA) has been catching investors’ eyes after announcing a 30% surge in its cloud backlog to $1.32 billion, along with meaningful growth in its annual contract value. This increase is directly linked to heightened demand for Pegasystems’ AI-powered platforms and a focused shift to a subscription-based business model. For anyone weighing what to do with PEGA, these numbers indicate a company potentially entering a new phase of growth, with a pipeline that now suggests stronger revenue visibility in the coming quarters.

This momentum is evident in the share price as well. Pegasystems stock has climbed 54% over the past year, even after factoring in a 10% dip in the past month. That upward movement reflects a broader rebound in sentiment for growth-oriented software companies, particularly those embracing AI-driven strategies. While PEGA’s most recent earnings exceeded expectations, headline risks from legal settlements and changing analyst outlooks have contributed to volatility, creating both nerves and opportunities for valuation-focused investors.

After a year marked by dramatic swings and ambitious growth signals, the question remains: Is Pegasystems trading at a discount to its underlying potential, or have these higher future earnings already been priced into the market?

Most Popular Narrative: 15.6% Undervalued

According to community narrative, Pegasystems is viewed as trading below fair value. Analysts cite key catalysts in its AI strategy and financial discipline as reasons that could justify a higher price target.

Emphasis on Pega Cloud's growth, combined with high client retention and strategic cross-selling or up-selling, is expected to bolster revenue and profitability, supporting overall earnings expansion.

Want to lift the lid on what is fueling this bullish outlook? The narrative is powered by robust profit projections and ambitious margin goals. However, the real surprise is in the underlying assumptions driving these numbers. Curious how accelerating tech adoption and bold earnings targets factor into this undervaluation story?

Result: Fair Value of $62.68 (UNDERVALUED)

Have a read of the narrative in full and understand what's behind the forecasts.

However, potential volatility in license revenue and ongoing macroeconomic uncertainties could quickly shift this outlook. As a result, future earnings may be less predictable.

Find out about the key risks to this Pegasystems narrative.

Another View: Challenging the Undervaluation

While the market sees potential undervaluation based on future earnings, our DCF model presents a less optimistic picture and suggests Pegasystems could actually be overvalued at today’s prices. Could different assumptions change the story?

Look into how the SWS DCF model arrives at its fair value.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Pegasystems for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover undervalued stocks based on their cash flows. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Build Your Own Pegasystems Narrative

If you want a fresh perspective or prefer to analyze the numbers independently, take a few minutes to build your own view, or simply do it your way.

A good starting point is our analysis highlighting 2 key rewards investors are optimistic about regarding Pegasystems.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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