This Small Tech With Big Growth Prospects Is Nearing A Buy Point

Key Points

• Shares of PagerDuty, which makes monitoring software, are approaching a cup-with-handle buy point above $33.77. 
• The company's youth and small market cap mean it may be poised for strong growth.
• Analysts have a "moderate buy" rating on the stock.
• On March 16, it reported better-than-expected quarterly growth.
• Analysts expect robust earnings growth in the next two years.

Shares of PagerDuty Inc. NYSE: PD, which makes monitoring software, are approaching a cup-with-handle buy point above $33.77. 

For investors looking for off-the-beaten-path stocks that could become winners, PagerDuty fits the bill. 

This company has several traits of stocks that rise in price, over time:

• It’s a young company, having gone public in April 2019.
• It’s also a small company, with a market capitalization of $2.8 billion. Smaller companies are more nimble than larger firms and more adaptable to changing business and economic conditions.
• It’s also easier for a small firm to launch new projects, as there are fewer layers of bureaucracy.
• PagerDuty is expected to grow earnings more than 1000% in the current year, fiscal 2024. 
• In fiscal 2025, earnings are seen growing another 38%.
• It’s in a business where demand is clearly high, and expected to grow. 

Topping Analysts’ Views

The stock rallied 14.76% in four-and-a-half times the average turnover on March 16, following better-than-expected fiscal fourth-quarter results. Earnings came in at $0.08 a share on revenue of $101 million. Analysts were looking at $.0.02 per share on the bottom line and $98.8 million on the top line. 

Those results significantly topped the year-earlier numbers, when the company reported a loss of $0.04 a share on revenue of $78.5 million.The company pivoted to profitability in 2023, posting net income of $0.04 per share. 

PagerDuty became profitable sooner than some analysts had forecast. After the previous earnings report, in December, shares rose in each of the following three weeks. 

In the company’s March 16 earnings call, CEO Jennifer Tejada noted that the company exceeded its own guidance, and achieved profitability a year ahead of its plan.

“We also surpassed $400 million in annual recurring revenue through a combination of ongoing product leadership in digital operations and our multiyear focus on winning in enterprise and mid-market,” she said.

Annual recurring revenue is a key metric to a company like PagerDuty, which sells its services on a subscription or contract basis.

“We ended the year with 68 of the Fortune 100 and nearly half of the Fortune 500 relying on PagerDuty to modernize their operations where we continue to see significant expansion opportunities,” Tejada added.

Strong Guidance

For the current quarter, PagerDuty expects revenue in the range of $102 million to $104 million, representing a growth rate of 19% to 22%. It’s forecasting net income per diluted share in the range of $0.09 to $0.10. 

Tejada said that implies an operating margin in the range of 6% to 7%.

For the full fiscal year 2024, the company is eyeing revenue in the range of $446 million to $452 million, representing a growth rate of 20% to 22%, and net income per diluted share coming in between $0.45 and $0.50. This would imply an operating margin of 8% to 9%.

Tejada also said the company expects free cash flow to rise in the second half of the year. That tracks with numerous analysts and other companies reporting, who expect business conditions to improve as the year progresses.

Of course, those expectations could always be scuttled if various economic developments, such as a recession or a continued increase in interest rates put a damper on business spending. 

Expanded Operating Margin

Citing “an uncertain economic environment,” Tejada said the company is “in a strong position this year to continue with revenue growth above 20% and expand our operating margin significantly.”

After the report, analysts at Morgan Stanley, Robert W. Baird and the Royal Bank of Canada boosted their price targets, as MarketBeat analyst data show. 

The consensus rating is “moderate buy,” with a price target of $34.45, a 10.61% upside. 

If you view its chart with a bar or candlestick view, you can see that PagerDuty began forming a consolidation in late March 2022. The stock has been rallying from its November 9 low, and has posted a gain of 20.11% in the past three months.

It began forming a handle when it hit resistance at $33.77 on February 2, which you can easily spot on its chart. That’s the current buy point. As of March 17, shares were trading 7.8% below that point, holding 6.1% above their 5-day moving average.

As a smaller company, it’s not particularly surprising to see PagerDuty with a high beta of 2.03, indicating it’s more volatile than the broader market. For investors interested in a tech with solid growth prospects, and who can tolerate some volatility, this would be a good watch list candidate.