What happened
The stock of Pegasystems (PEGA 4.60%) is posting big gains on Wednesday thanks to positive coverage from an analyst. The low-code software specialist's share price was up 14.4% as of 1:30 p.m. ET today, according to data from S&P Global Market Intelligence.
Wedbush Securities' senior equities research analyst Daniel Ives published a note on Pegasystems early this morning, upgrading his rating on the stock from neutral to outperform. The analyst also raised his one-year price target on the stock from $50 per share to $65. With the stock currently trading at roughly $56, that would suggest additional upside of 16%.
So what
In his recently published note, Ives said that he thinks Pegasystems' business is getting ready to turn a corner thanks to a widening foundation of subscription-based recurring revenue and improving margins from its cloud-based services making up a greater portion of overall sales. In particular, Ives sees generative artificial intelligence (AI) driving increased business for Pegasystems Cloud.
He also thinks that Pegasystems' effort to appeal a large monetary judgement against it will bear fruit. In May 2022, a Virginia jury found that the company had misappropriated trade secrets from its competitor Appian and ordered the company to pay more than $2 billion in damages. Ives anticipates that the actual amount Pegasystems winds up paying to Appian will be much lower than that initial judgment.
Now what
Ives expects that Pegasystems will wind up posting adjusted earnings per share of $1.51 on sales of $1.39 billion this year. While his revenue forecast is slightly below the $1.4 billion sales target that management laid out with the fourth-quarter report it published in February, his earnings forecast topped the company's guidance for per-share earnings of $1.50.
Looking ahead to next year, the analyst anticipates adjusted earnings of $2.10 per share on revenue of $1.53 billion. Based on that target for revenue growth of roughly 10% and earnings growth of roughly 39%, he is expecting substantial margin improvement.
Ives is a respected analyst, and the market clearly finds his recent bullish note on Pegasystems compelling, but investors should do some additional research before betting big on the stock. The low-code specialist still has significant upside potential, but shares are trading at approximately 37 times this year's expected earnings, and the company's growth-dependent valuation and unresolved legal appeal may open the door for volatile trading.
