Shareholders of PagerDuty would probably like to forget the past six months even happened. The stock dropped 54.7% and now trades at $7.31. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy PagerDuty, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think PagerDuty Will Underperform?
Despite the more favorable entry price, we don't have much confidence in PagerDuty. Here are three reasons we avoid PD and a stock we'd rather own.
1. Weak Billings Point to Soft Demand
Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.
PagerDuty’s billings came in at $150.7 million in Q4, and over the last four quarters, its year-on-year growth averaged 2.5%. This performance was underwhelming and suggests that increasing competition is causing challenges in acquiring/retaining customers. 
2. Projected Revenue Growth Shows Limited Upside
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect PagerDuty’s revenue to stall, a deceleration versus its 18.2% annualized growth for the past five years. This projection is underwhelming and implies its products and services will face some demand challenges.
3. Cash Flow Margin Set to Decline
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Over the next year, analysts predict PagerDuty’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 20.8% for the last 12 months will decrease to 19.7%.
Final Judgment
PagerDuty doesn’t pass our quality test. Following the recent decline, the stock trades at 1.3× forward price-to-sales (or $7.31 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are better stocks to buy right now. Let us point you toward the Amazon and PayPal of Latin America.
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