Last year, the pandemic proved the importance of a digital-first business model. More consumers are shopping online and connecting with brands through the internet, and companies that hope to win and maintain customer loyalty need a strong digital presence. To that end, enterprises around the globe are replacing outdated systems with more modern solutions.

In fact, the International Data Corp. (IDC) expects global spending on digital transformation to total $6.8 trillion between 2020 and 2023. And as that trend plays out, some of today's start-ups will become tomorrow's industry leaders, meaning investors have a chance to realize big gains in the years ahead.

With that in mind, PagerDuty (PD -0.88%) should be on your watchlist. This company plays a critical role in digital operations management, and if it executes on its opportunity, this stock could grow tenfold over the next 10 years. Here's why.

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Image source: Getty Images.

Digital operations management

As the world has become more digital, traditional incident response solutions have become less effective. In many cases, IT issues like website outages and system failures are still identified, triaged, and remediated manually, meaning those issues often last hours or even days. And the fallout from these situations can be quite costly in terms of customer dissatisfaction and lost revenue.

To address this problem, PagerDuty pioneered digital operations management for the modern enterprise. Its platform sits at the core of an organization's digital ecosystem, collecting data from hundreds of software-enabled systems. This includes IT software like Atlassian, application monitoring tools like Datadog, and security platforms like Okta, as well as numerous other technologies.

Using this data, PagerDuty leans on artificial intelligence to predict and automatically prevent downtime of business-critical systems. In certain circumstances, the entire process can be automated. However, when that's not an option, PagerDuty orchestrates a human response by provisioning the appropriate teams (e.g. IT, DevOps, customer service) with contextual information, helping them react in real time.

In short, PagerDuty replaces legacy solutions (which tend to be manual and reactive in nature) with a platform designed to proactively prevent problems, helping clients keep their digital ecosystems in working order. To that end, management puts its market opportunity at $36 billion.

Solid competitive position

As a pioneer in digital operations management, PagerDuty has a first-mover's advantage. The benefits here are twofold: First, the company has built out an extensive ecosystem of over 600 integrations, allowing its platform to collect data from virtually any software-enabled system or device. The breadth of its platform enables use cases that aren't possible with competing solutions.

Second, PagerDuty has nearly 12 years' worth of data. This includes both machine-generated signals that might predict a system outage, and human response data relating to the speed at which incidents are resolved. This vast repository of signals makes PagerDuty's artificial intelligence models more effective in automating the remediation process and mobilizing the appropriate team members.

Collectively, this value proposition has helped PagerDuty win big customers like Cisco, Lululemon, and Netflix. In fact, it currently serves 65% of the Fortune 100, and 45% of the Fortune 500. As of the most recent quarter, PagerDuty has 501 customers that generate over $100,000 in annual recurring revenue (ARR), up 36% from the prior year.

Not surprisingly, the company has posted strong top-line growth.


Q2 2020 (TTM)

Q2 2022 (TTM)



$142.7 million

$244.2 million


Data source: YCharts. TTM = trailing-12-months. CAGR = compound annual growth rate. Note: Q2 2022 ended July 31, 2021.

As a caveat, my biggest reservation about PagerDuty is slowing customer growth. During the most recent quarter, the company grew its customer base by just 6%. Investors need to monitor this metric closely in the coming quarters. However, PagerDuty's net retention rate hit 126% in the second quarter of fiscal 2022, meaning the average customer spent 26% more over the past year. That's a good sign for shareholders, as it underscores the stickiness of the PagerDuty platform.

Moreover, management is executing on a strong growth strategy that should bring more customers to the platform. Specifically, PagerDuty is pursuing clients in the federal vertical and international markets, both of which represent significant opportunities for future growth. The company is also building out its partner ecosystem, which currently represents less than 10% of new ARR each year, though management believes that figure will exceed 25% in time.

Worth the risk

As more companies implement new digital technologies, ensuring that business-critical systems remain up and running will become increasingly difficult. Case in point: The number of critical incidents rose 19% last year, and the average company experienced 105 incidents per month, according to a report from PagerDuty. That impetus should drive demand in the coming years.

With that in mind, I think this stock could produce tenfold returns over the next decade. PagerDuty currently has a market cap of $3.4 billion. But if the company can grow its top line at 30% per year, that figure would reach $34 billion by 2031, assuming the stock trades at a reasonable 10 times sales. That's why PagerDuty should be on your watchlist, if it's not already in your portfolio.