PagerDuty stock price target cut, maintains Buy rating on mixed quarter

On Wednesday, Craig-Hallum adjusted its outlook on shares of PagerDuty (NYSE:PD), reducing the stock's price target to $26 from the previous $30 while keeping a Buy rating on the shares.

The firm recognized that PagerDuty presented a mixed quarter and forecast in terms of revenue, although profitability metrics exceeded expectations. The company's shift towards larger and longer-duration deals has led to a more back-end loaded revenue recognition, causing a $9 million reduction in the annual revenue guidance midpoint, now standing at $465 million.

The company reported an 8% year-over-year growth in revenue for the quarter and anticipates similar growth in the upcoming quarters. Billings are expected to accelerate from 8% year-over-year this quarter to over 10% in the next quarter.

Dollar-Based Net Retention (DBNR) is projected to increase to 107% by the year's end, with Annual Recurring Revenue (ARR) also expected to grow by over 10% year-over-year. The quarter saw a significant positive outcome in Free Cash Flow (FCF), which was notably higher than anticipated.

Despite the positive long-term metrics, the company missed its third-quarter revenue target by approximately $4 million, with a total $9 million shortfall expected for the year. This indicates a level of unpredictability in the business.

The Small and Medium Business (SMB) segment continues to struggle, and while there was hope that it had reached its low point in the previous quarter, the latest commentary suggests less certainty. However, the macroeconomic environment for tech employment, a key driver for the SMB segment, seems to have stabilized, which could indicate an improvement year-over-year.

PagerDuty has seen enhancements in its enterprise sales processes, particularly with CFO and procurement-led purchases. Despite these advancements, sales cycles are taking longer than anticipated. Nonetheless, the company is still targeting steady top-line growth of 8% or more. Craig-Hallum finds the 15x FCF multiple to be an attractive valuation, leading to the decision to maintain the Buy rating on PagerDuty shares.

In other recent news, PagerDuty has seen several adjustments in stock price targets following its second-quarter earnings. TD Cowen, Scotiabank, Canaccord Genuity, and Baird have all revised their price targets for the company, maintaining various ratings.

The company's Q2 earnings revealed a slight miss on revenue expectations, and a roughly 2% reduction in the company's forecast, leading to a downward revision of its full-year revenue growth forecast to around 8% year-over-year.

Despite these challenges, PagerDuty reported a quarterly revenue of $115.9 million and a stronger-than-expected non-GAAP operating income of $20.1 million. The company's Annual Recurring Revenue (ARR) maintained a stable growth rate of 10%.

These recent developments reflect the company's focus on securing larger and longer-term contracts, despite the associated challenges. William Blair and RBC Capital continue to maintain their Outperform rating, indicating a belief in PagerDuty's potential.

InvestingPro Insights

As PagerDuty (NYSE:PD) navigates a mixed financial landscape, with a focus on larger, long-term deals, the InvestingPro data and tips provide additional context for investors considering the company's stock. According to InvestingPro data, PagerDuty holds a market cap of $1.75 billion and boasts an impressive gross profit margin of 81.97% for the last twelve months as of Q1 2025. This high margin underscores the company's ability to maintain profitability on its products and services, a positive sign for potential investors.

Moreover, despite the company trading near its 52-week low, which may raise concerns, the InvestingPro Tips highlight that the management has been actively buying back shares, signaling confidence in the company's future. Moreover, PagerDuty maintains a strong liquidity position, with liquid assets that exceed its short-term obligations. This robust financial health, coupled with the fact that analysts have revised their earnings upwards for the upcoming period, suggests potential for growth and stability. For investors looking for detailed analysis, InvestingPro offers more tips at https://www.investing.com/pro/PD, including expectations for net income growth this year.

While the P/E ratio stands at -20.45, indicating that the company is not currently profitable, analysts predict that PagerDuty will turn a profit this year. This potential shift towards profitability, along with the company's strategic moves towards larger deals, could be key factors for investors to watch. In summary, these insights from InvestingPro provide a nuanced view of PagerDuty's financial health and future prospects.

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