PagerDuty, Inc.'s (NYSE:PD) Shares Lagging The Industry But So Is The Business

With a price-to-sales (or "P/S") ratio of 2.9x PagerDuty, Inc. (NYSE:PD) may be sending bullish signals at the moment, given that almost half of all the Software companies in the United States have P/S ratios greater than 4.5x and even P/S higher than 10x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

We've discovered 1 warning sign about PagerDuty. View them for free.

View our latest analysis for PagerDuty

How Has PagerDuty Performed Recently?

Recent times haven't been great for PagerDuty as its revenue has been rising slower than most other companies. 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.

Keen to find out how analysts think PagerDuty's future stacks up against the industry? In that case, our free report is a great place to start.

How Is PagerDuty's Revenue Growth Trending?

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

Retrospectively, the last year delivered a decent 8.5% gain to the company's revenues. Pleasingly, revenue has also lifted 66% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the twelve analysts covering the company suggest revenue should grow by 7.8% per year over the next three years. With the industry predicted to deliver 15% growth each year, the company is positioned for a weaker revenue result.

In light of this, it's understandable that PagerDuty's P/S sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Plus, you should also learn about this 1 warning sign we've spotted with PagerDuty.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.