PagerDuty, Inc. (NYSE:PD) Not Doing Enough For Some Investors As Its Shares Slump 25%

The PagerDuty, Inc. (NYSE:PD) share price has fared very poorly over the last month, falling by a substantial 25%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 44% share price drop.

Since its price has dipped substantially, PagerDuty may be sending very bullish signals at the moment with its price-to-sales (or "P/S") ratio of 2.2x, since almost half of all companies in the Software industry in the United States have P/S ratios greater than 4.9x and even P/S higher than 11x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

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View our latest analysis for PagerDuty

What Does PagerDuty's Recent Performance Look Like?

With revenue growth that's inferior to most other companies of late, PagerDuty has been relatively sluggish. Perhaps the market is expecting the current trend of poor revenue growth to continue, which has kept the P/S suppressed. If you still like the company, you'd be hoping revenue doesn't get any worse and that you could pick up some stock while it's out of favour.

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Is There Any Revenue Growth Forecasted For PagerDuty?

In order to justify its P/S ratio, PagerDuty would need to produce anemic growth that's substantially trailing the industry.

Retrospectively, the last year delivered a decent 7.0% gain to the company's revenues. Pleasingly, revenue has also lifted 40% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenues over that time.

Turning to the outlook, the next year should generate growth of 3.4% as estimated by the nine analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 21%, which is noticeably more attractive.

With this in consideration, its clear as to why PagerDuty's P/S is falling short industry peers. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

Shares in PagerDuty have plummeted and its P/S has followed suit. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that PagerDuty maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. The company will need a change of fortune to justify the P/S rising higher in the future.

Before you take the next step, you should know about the 2 warning signs for PagerDuty that we have uncovered.

If these risks are making you reconsider your opinion on PagerDuty, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.