Investors Aren't Buying PagerDuty, Inc.'s (NYSE:PD) Revenues

PagerDuty, Inc.'s (NYSE:PD) price-to-sales (or "P/S") ratio of 3.9x might make it look like a buy right now compared to the Software industry in the United States, where around half of the companies have P/S ratios above 5.9x and even P/S above 13x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

View our latest analysis for PagerDuty

What Does PagerDuty's Recent Performance Look Like?

With revenue growth that's inferior to most other companies of late, PagerDuty has been relatively sluggish. The P/S ratio is probably low because investors think this lacklustre revenue performance isn't going to get any better. If you still like the company, you'd be hoping revenue doesn't get any worse and that you could pick up some stock while it's out of favour.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on PagerDuty.

Is There Any Revenue Growth Forecasted For PagerDuty?

The only time you'd be truly comfortable seeing a P/S as low as PagerDuty's is when the company's growth is on track to lag the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 8.7% last year. Pleasingly, revenue has also lifted 74% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenues over that time.

Turning to the outlook, the next year should generate growth of 9.3% as estimated by the twelve analysts watching the company. That's shaping up to be materially lower than the 24% growth forecast for the broader industry.

In light of this, it's understandable that PagerDuty's P/S sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that PagerDuty maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. The company will need a change of fortune to justify the P/S rising higher in the future.

We don't want to rain on the parade too much, but we did also find 1 warning sign for PagerDuty that you need to be mindful of.

If these risks are making you reconsider your opinion on PagerDuty, explore our interactive list of high quality stocks to get an idea of what else is out there.

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