PagerDuty ( NYSE: PD ) shares jumped more than 7% in premarket trading on Friday as Morgan Stanley upgraded the cloud computing company for several reasons, including its "resilient growth" and "attractive valuation."
Analyst Sanjit K Singh raised the firm's rating on PagerDuty ( PD ) shares to overweight from equal-weight and nudged the price target to $36 from $32, noting that now that shares have come in, it may be time for investors to take a second look at the company.
"PagerDuty's sustained growth and ~800 bps margin expansion has been rewarded by investors, with the stock outperforming peers only down (25%) in [calendar 2022] vs. the broader software group average down (45%) last year," Singh wrote in a note to clients. "Importantly, sustained top line growth coupled with future margin expansion appears underestimated by investors."
Singh noted that the company has grown at a compound annual rate of 32% over the past two years and net dollar retention rates have exceeded 120% for eight straight quarters. And though it's likely that PagerDuty ( PD ), like other software companies, sees slower growth this year due to the weak economy, it's likely that it will sustain at least 20% growth for a number of reasons, including "substantial progress" moving up-market; its role in responding to and resolving service incidents that can impact business operations and make it more valuable to customers; and a more favorable competitive environment in the $17B IT operations management market.
"The stability in revenue stemming from a subscription model has provided the breathing room for management to execute on initiatives to improve the cost structure which has thus far translated to 800 bps of operating margin improvement in [estimated fiscal 2023]," Singh explained.
The analyst added that PagerDuty's ( PD ) operating margins could expand to be "well ahead of consensus" and grow to 8%, 14% and 19% in fiscal 2024, 2025 and 2026, above the 2%, 7% and 9% Wall Street is expecting.
"We believe valuation currently undervalues the resilience of PagerDuty’s growth in its core market and the ability to rapidly improve FCF generation given the company's highly attractive unit economics (85% GM, 90%+ gross retention) which should translate to a ‘Rule of 40’ (revenue growth + operating margin) financial profile within the next few fiscal years," Singh added.
Last month, Morgan Stanley listed PagerDuty ( PD ) among the most likely takeover targets for private equity firms .
Analysts are largely bullish on PagerDuty ( PD ). It has a HOLD rating from Seeking Alpha authors , while Wall Street analysts rate it a BUY . Conversely, Seeking Alpha's quant system, which consistently beats the market, rates PD a HOLD .
For further details see:
PagerDuty pops as Morgan Stanley upgrades, citing 'resilient growth'