Goldman Sachs (NYSE:GS) has adjusted its outlook on PagerDuty (NYSE: NYSE:PD), reducing the price target to $21 from the previous $24 while maintaining a neutral rating on the stock.
The decision follows the company's second-quarter fiscal year 2025 earnings report, which presented a mix of results, including revenue and paid customer counts that fell short of consensus estimates by 1% and 2%, respectively.
The firm noted that PagerDuty's paid customer base continued to see a sequential decline, with a quarter-over-quarter drop of 76 customers, highlighting the company's significant exposure to small and medium-sized businesses (SMBs).
The company's trailing twelve-month (TTM) billings grew by 8% year-over-year, marking the slowest growth rate since the fourth quarter of fiscal year 2022. In contrast, PagerDuty's non-GAAP operating margin outperformed consensus estimates by approximately 400 basis points, reaching 17%.
This margin, however, was largely due to a deferral of headcount additions and marketing expenditures to the second half of fiscal year 2025 and the third quarter of fiscal year 2025, respectively.
Goldman Sachs acknowledged the company's efforts in top-down selling and promoting multi-product adoption but expressed concerns about the customers' perception of PagerDuty as a discretionary choice.
This sentiment is supported by a flat sequential net retention rate of 106%, with management indicating potential growth to 107% by the end of fiscal year 2025. The analysis suggests that returning to historical net retention rates above 120% may be challenging in the face of a more competitive landscape, including the emergence of offerings like Datadog (NASDAQ:DDOG)'s customer service management (CSM).
Furthermore, the recent cybersecurity outage, which could have been expected to bolster PagerDuty's sales pipeline, did not lead to a significant near-term sales boost that would support maintaining the original 10% growth forecast for fiscal year 2025.
In other recent news, PagerDuty reported second-quarter earnings that exceeded analyst predictions, however, the company's revenue fell short of expectations which led to a subsequent drop in its shares.
The digital operations management platform posted adjusted earnings per share of $0.21, surpassing the analyst consensus of $0.17, and a revenue growth of 7.7% YoY to $115.9 million, slightly below the projected $116.51 million.
Despite maintaining profitability with a non-GAAP operating income of $20.1 million and a free cash flow of $33.3 million for the quarter, the company's outlook has disappointed investors. PagerDuty has forecasted its third-quarter revenue to be between $115.5-$117.5 million, significantly lower than the $120.3 million consensus.
The full-year revenue guidance was also reduced to $463-$467 million from the earlier $471-$477 million range, falling short of the $473.7 million anticipated by analysts. Nonetheless, CEO Jennifer Tejada remains confident in the company's potential for ARR growth acceleration.
InvestingPro Insights
In light of the recent earnings report and subsequent outlook adjustment by Goldman Sachs for PagerDuty, InvestingPro provides additional context that investors may find valuable. According to InvestingPro data, PagerDuty holds a market capitalization of approximately $1.75 billion and is trading near its 52-week low, which could signal a potential entry point for investors looking for undervalued stocks. Despite concerns over its paid customer base, the company boasts impressive gross profit margins, reported at nearly 82% for the last twelve months as of Q1 2025.
InvestingPro Tips suggest that management's active share buyback strategy and the fact that PagerDuty holds more cash than debt on its balance sheet may provide some financial stability. Additionally, analysts have revised their earnings upwards for the upcoming period, which could hint at a more optimistic future outlook than the current sentiment suggests. For investors seeking a deeper analysis, there are 11 additional tips available on InvestingPro for PagerDuty (https://www.investing.com/pro/PD), offering a comprehensive view of the company's financial health and market position.
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