Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
On their first day of trading in April, shares of the automated alert software maker rocketed 60% to close above $38, and the stock hasn't looked back since. At its recent price of $47 and change, it has tacked on an additional 24% to shareholders' IPO-day winnings -- and now it looks like it may go up some more.
This morning, you see, the "quiet period" preventing the IPO's underwriters from talking up the stock expired, and Wall Street marched out en masse to (in at least some cases) sing PagerDuty's praises. So far, our friends at StreetInsider.com have noted comments from seven of the eight firms that brought PagerDuty public last month.
Three of these analysts still think PagerDuty is a pretty good deal. However, four of them don't. Here's what you need to know.
Let's start with the good news. Three of PagerDuty's underwriters remain fans to this day, and together, JPMorgan, William Blair, and Piper Jaffray accounted for 3.4 million of the 9.1 million shares sold at the IPO -- a not insignificant margin of support.
William Blair argues that PagerDuty has taken a leadership position in an emerging product category: Data-crunching all the data it can glean from a client company's servers, identifying crisis points and areas needing attention, and immediately notifying the key personnel within the client company of the problem so that they can fix it. Although other companies have various products that try to help with this in part, Blair believes PagerDuty has pioneered the business, which is now exploding in size:
In fiscal 2019, PagerDuty added 1,419 net new customers and delivered an ARR-based net expansion rate of 140%. We estimate this translated to 53% ARR growth, which surpassed revenue growth of 48% and represented an acceleration from the prior year. In our view, these metrics demonstrate strong market traction and validation of PagerDuty's value proposition.
JPMorgan thinks this puts PagerDuty in position to become the "digital nervous system" that makes it possible for corporations to quickly identify issues before they become problems, reducing downtime and enhancing return on investment. And in a note covered by TheFly.com, Piper Jaffray adds that PagerDuty's services will have particular value in the midst of corporate "Digital Transformation" initiatives, permitting websites to remain up even as they're being worked on -- what it calls a "clear and tangible" value proposition.
All three of these bankers agree that PagerDuty stock remains a buy even at twice the $24 IPO price. Indeed, Piper predicts the stock will continue rising to at least $52, while JPMorgan posits a $55 target price on the shares.
Or is PagerDuty's run done?
As far as PagerDuty has come already, JPMorgan's top o' the market target price implies there's still another 16% worth of profits in store for investors who hold fast to this rocketing recent IPO -- but given the near-100% profits early investors have already enjoyed, other analysts are starting to get nervous.
Morgan Stanley -- lead underwriter on the IPO, with 3.2 million shares underwritten -- writes today that despite seeing a $25 billion market for PagerDuty's services, it can only rate the stock equal weight. PagerDuty may be expected to grow revenue at better than 30% annually over the next year or two, says the analyst, but there's always a risk that rivals like Splunk and Atlassian will slow it down. At a valuation of nearly 30 times sales (PagerDuty has no profits), Morgan Stanley isn't entirely confident the stock can continue to beat the market from here.
Nor is Morgan Stanley the only analyst with reservations. RBC Capital still thinks PagerDuty is a "disruptive software vendor" with a huge market ahead of it -- but worries that the buying frenzy surrounding shares these past few weeks has priced a lot of this potential into the stock already. KeyBanc, too, sees PagerDuty's "strong" revenue growth ahead reflected in the share price already, while BTIG Research goes a step further -- calling the stock "priced for perfection."
What lies ahead for investors
I can't say I disagree. Thirty times sales would be a mighty high valuation even for a profitable stock, and right now, PagerDuty has no profits -- although to be fair, neither do the rivals Splunk and Atlassian.
On the other hand, if you want to compare PagerDuty to these two, well, Splunk shares cost 11 times sales, while even extremely valued Atlassian sells for a slight discount to PagerDuty -- a "mere" 24 times sales.
Long story short, if you think that investing in a profitless company that's competing with a pair of other profitless companies -- each apparently vying to burn more money than the others in hopes of winning more unprofitable market share -- is a good way to make money, well...it actually has worked out pretty well this past month! Personally, though, I'd say the odds of such irrational exuberance continuing to pay off in the long term look rather, well, long.
As for me, I plan to stay away until this IPO cools down a bit, and the prospects for profits get a bit easier to assess.