Pegasystems has had an impressive run over the past six months. While the S&P 500 has been flat, the stock has returned 6.7% and now trades at $72.71. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Pegasystems, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Despite the momentum, we're sitting this one out for now. Here are three reasons why there are better opportunities than PEGA and a stock we'd rather own.
Why Is Pegasystems Not Exciting?
Founded by Alan Trefler in 1983, Pegasystems (NASDAQ: PEGA) offers a software-as-a-service platform to automate and optimize workflows in customer service and engagement.
1. Long-Term Revenue Growth Disappoints
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last three years, Pegasystems grew its sales at a weak 7.3% compounded annual growth rate. This fell short of our benchmark for the software sector. 
2. Weak Billings Point to Soft Demand
Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.
Pegasystems’s billings came in at $564.2 million in Q4, and over the last four quarters, its year-on-year growth averaged 6.8%. This performance was underwhelming and suggests that increasing competition is causing challenges in acquiring/retaining customers. 
3. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Pegasystems’s revenue to rise by 6.6%, close to its 7.3% annualized growth for the past three years. This projection doesn't excite us and implies its newer products and services will not catalyze better top-line performance yet.
Final Judgment
Pegasystems isn’t a terrible business, but it isn’t one of our picks. With its shares beating the market recently, the stock trades at 4.4× forward price-to-sales (or $72.71 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better stocks to buy right now. We’d suggest looking at the most entrenched endpoint security platform on the market.
Stocks We Like More Than Pegasystems
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