PagerDuty: Digital Transformation Growth And Attractive Valuation

The digital transformation revolution is offering exponential opportunities for investors to profit in the years ahead. Unfortunately, many of the companies that capitalize on this massive growth opportunity are trading at relatively expensive valuations, and deservedly so in many cases. You can't expect to buy the best stocks in the market for bargain valuations.

But still, investors need to be especially careful with stock selection in this space because current valuation levels provide no room for error. When the stock is priced for aggressive growth expectations, the company needs to deliver in line or even exceed those expectations for the stock price to do well.

But PagerDuty (PD) could be a notable exception in this segment. The company is still relatively small, with enormous room for growth, and the stock is very reasonably priced in comparison to other names in the sector.

There is a reason why the stock trades at discount to peers, and this is that growth seems to be slowing down while competitive pressure is increasing. But the point is that these factors are already reflected in market expectations and hence incorporated in the stock price. If management executes well, PagerDuty stock has plenty of room for gains from current price levels.

High Risk And High Potential

Companies that benefit from the digital transformation revolution have been on fire lately. These companies are growing at full speed, and their stock prices have skyrocketed in many cases. Valuation should always be assessed for each specific case in particular, and the best companies in the world can still deliver outstanding returns form demanding valuation levels. Nevertheless, it is fair to say that valuation is arguably the main risk factor for investors in high-growth stocks in areas such as software in the near term.

PagerDuty is a different story. The company is facing increasing competition from Splunk (SPLK) and Atlassian (TEAM) with lower-priced products, and PagerDuty provided a fairly modest outlook in the most recent earnings conference call.

In this context, the stock price has underperformed other players in the sector, and the chart has languished in comparison to stocks benefiting from digital transformation during the pandemic.

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Disclosure: I am/we are long PD, AMZN.

Disclaimer: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship ...

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