One thing you can say about Cathie Wood is that she's persistent. The aggressive growth investor who's also the co-founder, CEO, and ace stock picker at Ark Invest enjoys swinging the fences. She's also not afraid to go for the safe single, binge-buying some of her favorite holdings over and over again.
She publishes Ark Invest's transactions at the end of every market day. Something out of the ordinary happened on Friday night, as she announced her purchases from earlier in the day. PagerDuty (NYSE: PD) was one of the six existing positions that she added to on Friday. More importantly, she bought shares of the cloud-based provider of enterprise analytics and uptime monitoring solutions every single trading day in June. She obviously likes PagerDuty right now. Should you? Let's take a closer look.
Reporting for duty
Enterprise software companies are all about making businesses more efficient, and that's what PagerDuty's growing suite of offerings aims to accomplish. From automation tools that help increase task completion speeds and lower support costs to its incident management platform that allows clients to navigate through hiccups and come out of disruptions even smarter, PagerDuty's ambitious isn't on trial.
Growth has been the problem, particularly given its recent run of slowing top-line gains. Year-over-year revenue growth has decelerated for seven consecutive financial reports, from a starting point of 34% down to just 8% nearly two years later.
- Q2 2023: 34%
- Q3 2023: 31%
- Q4 2023: 29%
- Q1 2024: 21%
- Q2 2024: 19%
- Q3 2024: 15%
- Q4 2024: 10%
- Q1 2025: 8%
PagerDuty's dollar-based net retention rate has disintegrated from 116% to 106% over the past year, and its paid customers count has stalled around 15,100 in that time. The bottom line has also been problematic. It has never turned a profit on a reported basis, and analysts don't see that changing anytime soon. It did announce a small round of layoffs earlier this year, but it remains to be seen if the cost controls will pay off without sacrificing a potential return to top-line growth.
Image source: Getty Images.
Knocking on Wood
Cathie Wood naturally has a more upbeat read on PagerDuty than the downward sloping fundamentals. She has been buying a piece of PagerDuty every trading day since May 31. Despite the recent daily trickle of purchases, it remains one of the smallest positions across the combined holdings of Ark Invest's exchange-traded funds.
She's not the only one who was buying. Shares of PagerDuty soared 21% last month.
There are some reasons to be upbeat about PagerDuty's near-term prospects. For starters, despite the single-digit revenue growth that PagerDuty posted in its latest quarter, Wall Street pros see it returning to double-digit revenue gains for the entire fiscal year and accelerating in each of the next two years.
Profitability on an adjusted basis is also expected to climb 14% next year and another 24% in fiscal 2027. This prices PagerDuty stock at 23 times that fiscal year's adjusted earnings, but it has also posted double-digit percentage beats in each of the past four reports.
The naysayers are still plentiful, and that's not necessarily a bad thing. Nearly 12% of PagerDuty's shares are currently being sold short, approaching the all-time high it notched earlier this year. In the right environment, even a modest bullish catalyst can send the boo-birds scrambling for cover, and the short squeeze would theoretically push the stock higher.
Sentiment could be turning after a buoyant June. Chad Bennett at Craig-Hallum upgraded the stock last week, rallying around the potential for revenue gains to accelerate after bottoming out in the fiscal first quarter. His new $30 price target implies another 31% of upside in the shares. A reignited PagerDuty should result in either the resumption of customer growth or a reversal in the retreat of its dollar-based net retention rate. In an ideal world it would be a little bit of both leading the charge, and PagerDuty reaching reported profitability sooner than expected. For now, a once out-of-favor software-as-a-service company -- or SaaS stock -- is starting to court believers. Wood seems to have the right idea when it comes to buying PagerDuty this summer.
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Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends PagerDuty. The Motley Fool has a disclosure policy.
