Pegasystems trades at $57.03 per share and has stayed right on track with the overall market, gaining 12% over the last six months. At the same time, the S&P 500 has returned 15.3%.
Is now the time to buy Pegasystems, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free for active Edge members.
Why Is Pegasystems Not Exciting?
We don't have much confidence in Pegasystems. Here are three reasons why PEGA doesn't excite us and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance can indicate its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last five years, Pegasystems grew its sales at a 11.7% compounded annual growth rate. Although this growth is acceptable on an absolute basis, it fell short of our standards for the software sector, which enjoys a number of secular tailwinds.
2. 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 4.2%, a deceleration versus its 11.7% annualized growth for the past five years. This projection is underwhelming and indicates its products and services will face some demand challenges.
3. Long Payback Periods Delay Returns
The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.
Pegasystems’s recent customer acquisition efforts haven’t yielded returns as its CAC payback period was negative this quarter, meaning its incremental sales and marketing investments outpaced its revenue. The company’s inefficiency indicates it operates in a competitive market and must continue investing to grow.
Final Judgment
Pegasystems isn’t a terrible business, but it doesn’t pass our bar. That said, the stock currently trades at 5.6× forward price-to-sales (or $57.03 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere. We’d recommend looking at the most dominant software business in the world.
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