Why I'm passing on Pager Duty (PD)

Why am I writing a post on a company I’m passing on? I’ve been meaning to do a good example post on how we evaluate a company, in hopes that others can use it as a template. Here’s my attempt.

[Here are some basics I like to see that set the tone for what kind of company we’re looking at, and why it might be interesting]


What they do: SaaS incident response platform…from what I can tell means it is software that automatically sends texts and emails to the appropriate people when events trigger them. Yes this sounds boring, but it’s interesting because of its traction with important customers, many of our customers among them. The following post made me take another look, but unfortunately the poster did not realize that NRR and revenue growth rate are now lower: https://discussion.fool.com/pagerduty-pd-is-a-good-one-to-check-…
Mkt Cap: $1.9 Billion (77.2 shares outstanding)
TTM Revenue: $166 Million
PS ratio: ~11.5
Revenue Growth in most recent quarter: 36%
NRR most recent quarter 122%
GM in most recent quarter: 87% (!)
TTM Cash Flow: -$173,000 (basically break-even)
Cash: $351.4 million

[So from these basics we can see that this is a tiny company, relatively low PS ratio, but also relatively slow revenue growth. But it’s a SaaS company, has a great gross margin, they have a lot of cash and aren’t losing money, and their customer roster is impressive. Enough to be interested, but the question remains, why is growth not faster?]


Jul 2019 Q: 132% (130%+ for 8 quarters before this)
Oct 2019 Q: 129%
Jan 2020 Q: 122%
Apr 2020 guidance: 120% - 123%

YoY Revenue Growth
Apr 2019 Q: 49%
Jul 2019 Q: 45%
Oct 2019 Q: 37%
Jan 2020 Q: 36%
Apr 2020 guidance: 29% - 31%

Customer count
Apr 2019 Q: 11,600+
Jul 2019 Q: 12,000+
Oct 2019 Q: 12,000+
Jan 2020 Q: 12,700+

[These are just a few trends that seem relevant here. There could be other metrics to look at for other companies. But I’m showing a few things here that I will discuss below.]

When the CFO talked about the falling NRR on the most recent conference call, he said, We attribute most of the decline from the third quarter number to pockets of sales execution in specific territories where we have not managed to cover our existing accounts as effectively. They referenced this later in the call as well. I’m glad they care about this, and are addressing it, but sales issues are not a good thing. It’s reasonable that this has weighed on the stock.

They really do have all these great customers (Crowdstrike, Zoom, Shopify, etc etc etc) but the growth is underwhelming. Both revenue growth and overall customer growth. They also have almost 13,000 customers and $166m in TTM revenue, so a lot of these customers must be extremely small and not pay them more than a few thousand dollars a year. They talk about large new sign ups and even that Of the top 100 new customers we partnered within fiscal 2020, 68 of them subscribed to more than one product. Well, then why aren’t they large enough to move revenue growth rate higher? I think this is another instance of story vs execution (a la TTD). It’s a little hard to imagine a huge TAM here, although they say it is $100 billion (which I find humorous).

The valuation and the story are attractive, but the growth rate isn’t. This stock could do well for a number of reasons (maybe growth accelerates?), but it could also go nowhere for a while. It’s simply not a “heck yes,” so for me that means it’s an easy “no.”



Nice summary there. The biggest outstanding question I have is why the company is predicting revenue growth rate going from ~36% to ~30%.

PagerDuty works by pricing for users: https://www.pagerduty.com/pricing/

However, typically a company only adds users for those who are on the production support rotation. This is a subset of the tech team typically and why the number of users per company would be lower than than some other SaaS companies. Just to give an example, let’s say there is a 10,000 person company with 2,000 tech workers. There might be only 200 of those tech workers who would be on production support rotation and need PagerDuty licenses.

There are a few encouraging signs I have seen for the business though which could lead to better revenue growth rates. That recent Okta report mentioned that OpsGenie is growing at 180%. This is a PagerDuty competitor from Atlassian. PagerDuty is generally considered the better solution which is why you see almost all of the companies mentioned on this board as customers.

As far as valuation it’s been hovering around 10 Price/Sales which is much lower than other companies in the space. To give some comparisons, DDOG is around 30, OKTA 35, SHOP 45, ZM 60. Additionally the 351 million cash on hand is much higher than peers as percentage of market cap.

I have seen a few posts about how the number of production support incidents is up massively recently. This is due to both increased traffic at other sites, business disruptions and unusual traffic patterns.

Q1 earnings on June 4th, should provide a lot of clarity if the company is benefiting or not from current events.


Hey Bear, thanks for that great summary. I’ve just reviewed PD conference call and those were pretty much my thoughts. The only slight counterpoint is they do seem to have great customers. From my notes:

{GD: their customer list is impressive. “Landed or expanded with Booking.com, American Express, Netflix, Vanguard, Crowdstrike, ADP?, Snowflake, Peloton, IOdesk, Shopify, TripActions (corporate travel)” - These are best-of-breed ‘tech’ companies. If they’re using PD…?}


~60% Fortune 500, 9 of Fortune 10.

But if you have 60% of the F500, why isn’t the ‘expand’ bigger?

The revenue growth slowing is undeniable and they mention the sales issues several times (so Land is down). They do have a new CRO who is tasked with sorting their sales.

Revenue per customer is increasing but not at a rapid rate. Customers >$100k are increasing as well but again slowing rates (51% 51% 49% 42%).

I’m passing as well, but it’s an interesting company that may have some potential in a more distributed world.



One small quote that popped out in the CC was about Zoom:

“People are staring into the Zoom machine hour after hour. Thank you, Eric, for making this possible for us”.

I always find it odd when companies call out other companies so specifically. I mean, no-one says “Thanks Jeff (Bezos) for giving us AWS”. Zoom might be on to something :wink:


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I tiny note regarding competition: Remember OpsGenie was only acquired in Sept 2018 and then took months to integrate (it started as a free add-on during this time). It makes sense that an Atlassian add-on service would see huge growth numbers in the last 12 months since existing customer barrier-to-entry is so low. I have no idea how to adjust for this, but thought it worth a mention.

Thank you very much for this post. I’m going to bookmark it to revisit at the next earnings release. There is a lot to like here. If revenue growth gets back above 45% and cash flow improves even a little, and with these margins and PS, AND the fact they are in an area where customers rely on thm when emergencies happen, meaning there is a trust moat/stickiness …very interesting.