PagerDuty, Inc (NYSE:PD) is an international incident response technology company. The company operates a software-as-a-service (SaaS) platform that enables developers, information technology (IT) departments, and DevOps to respond efficiently to events so the business continues to run smoothly. PagerDuty has been public since its IPO in April of 2019.
The company was founded, and aptly named, by software developers who were on call 24/7 to troubleshoot problems with cloud services. For our younger readers, pagers were devices that were used in prehistoric times, you know B.C.-before cellphones, to alert someone that they were needed. These software developers sought to produce a more efficient way to manage digital operations and PagerDuty was born. PagerDuty's platform enables automated assignment of incident responses based on the customer's workforce availability and other factors. It also enables real-time tracking of responses, among other features.
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Exceptional company leadership
The leadership of an enterprise is often the critical factor in the company's ultimate success. Investors have seen this come to fruition through Steve Jobs and his leadership at Apple (NASDAQ:AAPL), Bill Gates of Microsoft (NASDAQ:MSFT) and with today's stars like Elon Musk of Tesla (NASDAQ:TSLA) and Matthew Prince of Cloudflare (NYSE:NET). Notice the fact that all of these companies have significantly rewarded shareholders. The PagerDuty leadership team is composed of many former employees and executives of Amazon (NASDAQ:AMZN), Salesforce (NYSE:CRM), and Keynote Systems, all of which are highly successful technology companies.
CEO Jennifer Tejada has decades of experience in the industry including as CEO of Keynote Systems. Keynote Systems was a profitable, cloud-based software development company which was acquired by Dynatrace in 2015. Alex Solomon, General Manager and one of the original founders of PagerDuty, has his roots as an Amazon software engineer. Dave Justice, the Chief Revenue Officer, has over 20 years experience most recently as Executive Vice President at the highly successful Salesforce. The Chief Product Officer Sean Scott also hails from Amazon and brings more than two decades of industry experience. This is likely why Amazon CEO Andy Jassy has said "If you don't have availability, you don't have a customer experience. If you're not using PagerDuty, you're missing the boat."
Impressive metrics indicate scalability
There are several metrics that are important to software companies which indicate the ability to scale to profitability. First, PagerDuty has a terrific gross margin. At over 82%, PagerDuty's gross margin eclipses SaaS heavyweights like ServiceNow (NYSE:NOW) and Salesforce (NYSE:CRM), which both have gross margins typically in the mid-70% range.
PagerDuty has also begun to accelerate its revenue growth. For the quarter ending July 31, 2021 the company earned $67.5M. This is over 6% more than the prior quarter and 33% more than the same period in 2020. For the period ending April 30, 2021 the company earned $63.6M. Notably this is only 28% over the same period in 2020. The year-over-year growth of 33% vs. 28% highlights the acceleration trend. When PagerDuty reports earnings for the quarter ending October 31, 2021 it will be critical that this trend continue.
The company estimates its total addressable market (TAM) is $36 billion which is huge. With trailing twelve months revenue of $244M, there is a plethora of runway for the company. The customer renewal rate is another key, especially when revenues are subscription based. PagerDuty is reporting an impressive renewal rate of 95% and net retention rate of 126%. Net retention rate over 100% means that current customers are not only renewing at a high rate, but also spending more with PagerDuty as time goes on.
Aggressive adoption of products
Like most developing SaaS companies, PagerDuty spends much of its revenue on sales and marketing in order to rapidly increase the customer base. PagerDuty currently reports 18,000 companies who use its products. This includes more than 65% of the Fortune 100 and 45% of the Fortune 500 according to the company. This is critical as many of these are "large" customers. Larger customers are defined as those providing more than $100 thousand in annual recurring revenues. PagerDuty currently boasts over 500 large customers which is a 36% increase in one year. The companies span all sectors from tech to manufacturing and include domestic and international enterprises.
The Verdict
All developing SaaS companies carry some risk, and PagerDuty is no exception. The company is not profitable and will likely not be profitable on a GAAP basis for several years. With that said, it has many markings of a highly successful SaaS company in the early stages. The forward price-to-sales (PS) ratio of 13 is reasonable based on its growth and scalability metrics. If the company's leadership continues to drive sales growth and customer adoption then PagerDuty stock will be a long-term winner for investors.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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