Pegasystems has been treading water for the past six months, recording a small return of 2.3% while holding steady at $97.20.
Is there a buying opportunity in Pegasystems, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is Pegasystems Not Exciting?
We don't have much confidence in Pegasystems. Here are three reasons why you should be careful with PEGA and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last three years, Pegasystems grew its sales at a sluggish 8.8% compounded annual growth rate. This fell short of our benchmark for the software sector. 
2. Revenue Projections Show Stormy Skies Ahead
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 drop by 2.2%, a decrease from its 8.8% annualized growth for the past three years. This projection is underwhelming and suggests its products and services will face some demand challenges.
3. Long Payback Periods Delay Returns
The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.
Pegasystems’s recent customer acquisition efforts haven’t yielded returns as its CAC payback period was negative this quarter, meaning its incremental sales and marketing investments outpaced its revenue. The company’s inefficiency indicates it operates in a competitive market and must continue investing to grow.
Final Judgment
Pegasystems isn’t a terrible business, but it isn’t one of our picks. That said, the stock currently trades at 5.6× forward price-to-sales (or $97.20 per share). Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're fairly confident there are better investments elsewhere. We’d recommend looking at the most entrenched endpoint security platform on the market.
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