PagerDuty shares soared this Friday

Pagerduty shares are up more than 5% in pre-market trading on Friday.

PagerDuty shares rose this Friday morning, adding more than 5% in pre-market trading to 27.5. 

PagerDuty’s short-term technical score of 64 indicates that the stock has traded more bullishly over the past month than 64% of stocks in the market.

This is also because Morgan Stanley upgraded the cloud computing company for several reasons, including its resilient growth and attractive valuation.

Analyst Sanjit K Singh upgraded the company rating for PagerDuty shares and raised the price target from $32 to $36, indicating that now that the stock has risen, it is time for investors to take another look at the company.

“PagerDuty’s sustained growth and margin expansion of ~800 bps have been rewarded by investors.

With the stock outperforming peers only (25%) in [calendar 2022] vs. the broader software group average (45%) last year,” Singh wrote. 

He also expressed. “More importantly, investors appear to underestimate sustained gross revenue growth along with future margin expansion.” As reported by seekingalpha.com

We believe the valuation currently underestimates PagerDuty’s ability to grow in its core market.

And also its ability to rapidly improve FCF generation, given the company’s attractive unit economics (85% GM, 90%+ gross retention).

Which should translate into a financial profile based on the ‘rule of 40’ (revenue growth + operational margin) in the coming years,” Singh added.

PagerDuty delivered strong results in its most recent quarterly report, showing that the stock has outperformed its software-as-a-service peers in recent months, so Morgan Stanley is not alone in seeing an opportunity here.

What’s next for PagerDuty?

The company recently won the AWS Regional Global Partner award, strengthening its relationships with infrastructure leader Amazon which also helps its long-term growth.

Operating at a price-to-sales ratio of 7, the company continues to be cheaper than its direct competition in the software-as-a-service space, so the turnaround to profitability should accelerate, as its adjusted operating margin increased by 1,000 basis points and it is forecast to continue to tread water.

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