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Topic: Growth Stocks

This IPO offers prospects for gains

One Successful Investor way to cut IPO risk—and distinguish the good from the bad—is to wait till a new issue has survived a market slump and/or recession. And in the case of tech-focused PagerDuty, it has. The stock dropped to near $13 in March 2020 as COVID-19 took hold. But its business continued to prosper by applying artificial intelligence (AI) to help its customers shorten or avoid disruptions and to save money.

Overall, this sets PagerDuty up with a winning business model that could lead to exponential growth in future years. We recommend this stock as a Power Buy.

PAGERDUTY INC., $40.47, is a buy. The company (New York symbol PD; TSINetwork Rating: Extra Risk) (www.pagerduty.com; Shares outstanding: 83.6 million; Market cap: $3.4 billion; No dividends paid) operates a platform that collects real-time data from software systems and devices and then notifies its IT customers of any incident that could harm their operations.

PagerDuty’s platform sits on top of a company’s technology systems, taking in data. As it receives the data, it then uses analytics and artificial intelligence (AI) to “learn on the go,” to prevent adverse events from recurring. The company’s software platform aims to help clients take action in real time to save lost revenue and retain clients, while limiting damage to their brands and reputations.

All this is increasingly important for companies as consumers become more digitally savvy and demanding. They want food delivered to their home from the restaurant of their choice within an hour; they want to stream a movie on an iPhone while waiting in line at the airport, or do their shopping from the couch with just a few clicks on a smartphone.

PagerDuty first sold shares to the public through an IPO in April 2019 at $24 a share.

For the three months ended April 30, 2021, revenue rose 27.7%, to $63.6 million from $49.8 million a year earlier. Sales were higher due to the addition of new customers. In addition, many of the company’s existing customers increased their spending on PagerDuty services.

Excluding one-time items, the company lost $6.5 million, or $0.08 a share. That’s more than twice its year-earlier loss of $3.0 million, or $0.04. The loss rose as the company spent more on research as well as marketing to win more clients.

On April 30, 2021, PagerDuty’s customer base exceeded 16,000 firms globally, including 60% of Fortune 100 companies and 40% of the Fortune 500. Prominent clients include Slack, Zoom, NBCUniversal, Netflix, Bell Canada, Nvidia, TD Bank, the BBC, Twitter, Pinterest and Costco.

PagerDuty continues to invest a very high 28% of its sales on research to position itself as the market leader in innovation and technology. While research spending hurts current earnings, it creates a hidden asset that helps PagerDuty compete in a fast-growing, rapidly changing industry.

Due to COVID-19, IT teams have been working from home. More than ever, they need tools for troubleshooting problems. That spurs demand for the company’s services. Still, following the pandemic, PagerDuty should experience a jump in revenue as the economy returns to normal.

The company operates in a very competitive niche. Still, it has lots of growth ahead as businesses—from major corporations to small firms—place more and more emphasis on dealing with customers digitally.

PagerDuty also has lots of room for expansion internationally. The company now generates only around 22% of its revenue outside of the U.S.

To top it off, the company could conceivably be an attractive takeover candidate for any number of major tech firms that want to move into its growth markets.

PagerDuty is a Power Buy.

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