Why Pegasystems, Inc. Shares Popped

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Pegasystems, Inc. (NASDAQ: PEGA  ) rose nearly 20% Wednesday after the company absolutely crushed expectations with its third-quarter report.

So what: Quarterly revenue rose 20% year over year to $122 million, which translated to 154% adjusted earnings growth over the same period to $0.33 per diluted share. For reference, analysts were looking for adjusted earnings of just $0.18 per share on lower sales of $116.53 million.

Now what: Software license revenue led the way, growing 34% year to date and helped by what Pegasystems founding CEO Alan Trefler described as "enthusiastic feedback regarding the increased capability and ease of use in our Pega 7 release."

To be sure, there wasn't much not to like about Pegasystems' results. Still, it's worth noting the stock isn't exactly cheap, trading at 56 times last year's earnings and nearly 33 times next year's estimates. What's more, Pegasystems management was forthright during the subsequent conference call in warning that the fourth-quarter pipeline contains "a few very large transactions that are important to [...] achieving [the company's] bookings target for the year."

As a result, though that doesn't necessarily affect Pegasystems' solid long-term business, investors should remain cognizant any slips in those large opportunities could result in a significant pullback over the short term. At the very least, I think Pegasystems stock at today's levels could represent a worthy addition to investors' watchlists.

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