What a time it’s been for Pegasystems. In the past six months alone, the company’s stock price has increased by a massive 53.3%, reaching $106.86 per share. This run-up might have investors contemplating their next move.
Is now the time to buy Pegasystems, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
We’re happy investors have made money, but 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.
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
Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last three years, Pegasystems grew its sales at a weak 7.4% 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 $320.3 million in Q3, and over the last four quarters, its year-on-year growth averaged 9.9%. This performance slightly lagged the sector 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 4.4%, a deceleration versus its 7.4% annualized growth for the past three years. This projection doesn't excite us and implies its products and services will see some demand headwinds.
Final Judgment
Pegasystems isn’t a terrible business, but it isn’t one of our picks. Following the recent surge, the stock trades at 5.9× forward price-to-sales (or $106.86 per share). Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're pretty confident there are superior stocks to buy right now. We’d suggest looking at the most dominant software business in the world.
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