PagerDuty (NYSE:PD) is out marketing their IPO this week. They are doing a masterful job and positioning themselves as the new “brains” of the online world. You need to do that then you filing range is already at 13x revenues!
It is a good story. Maybe not as good as a Twilio (TWLO) but if they are going to do well, especially if some of their new products gain traction with customers.
PagerDuty captures the myriad alerts from systems, devices, and sensors and pre-processes them in a way that makes it easier to focus on “incidents” that can be perceived out of the vast noise created by all these inputs.
One thing that PagerDuty has built that acts as a “moat” are their vast integrations with hundreds of different sources and destinations of alerts and data. They have built these with an eye to performance and scalability so they are more robust than slower integrations you might see from companies like Zapier (private.)
The initial MVP and starting use case for PagerDuty runs along the lines of “if this thing happens, notify me right away.” By “this thing” it’s not just a matter of a single alert but rather a group of them that would define an “incident” that requires human attention.
PagerDuty does more than just provide an incident alert – they are able to do some basic orchestration including taking some basic actions and notifying different people across the company. It’s not clear just how much AI and “machine learning” they have in the product but their aim is to use those techniques to be able to automate more responses and generate better analytics.
Machine-generated data is proliferating at a torrid pace. If this sounds familiar it’s the same story that Splunk (SPLK) told when they came public back in 2012. Splunk was focused more on mainframe logfiles back then but they have expanded their footprint dramatically since then.
One way to think about PagerDuty is that is one of the many components of a kind of cloud-based “Enterprise 2.0” that relies on infrastructure from companies like HubSpot (HUBS), Tableau (DATA), Splunk (SPLK), Atlassian (TEAM), ServiceNow (NOW), Zendesk (ZEN), New Relic (NEWR), Twilio (TWLO), EverBridge (EVBG) and Elastic (ESTC.)
The Market & Competition
According to the company, their “current TAM” is $25B with a possible expansion to $100B if they could dramatically increase their ARPU. Their estimates are based on actual numbers in development, IT operations, and customer support so they are hard to argue with. But there is real competition and perhaps more importantly, lots of other ways to go at the problem.
First of all direct competition – the two that get named the most are Splunk/VictorOps (SPLK) and Atlassian/OpsGenie (TEAM). Both Splunk and Atlassian are tough competitors with lots of technology, financial resources, and solid execution. Splunk bought VictorOps in 2018 for just $120M. They also added another security-focused automation firm, Phantom Cyber, for $350M. Right now Splunk/VictorOps is considered a strong choice for situations dominated by IT Ops.
Atlassian/OpsGenie is typically at the top of the short list for Dev Ops purchasers. Atlassian bought OpsGenie in 2018 for $295M and integrated it into their existing IT service management product, Jira Ops. At the time OpsGenie was reported to have 3,000 customers.
In addition to these three, there are of course the legacy firms out there but they have failed to compete very effectively for “Enterprise 2.0” business. But there are also other ways to go after the problem and companies in the space can leverage the cloud to offer competitive offerings. For example, Everbridge (EVBG) has been having success with their brand new IT Incident Response product.
But today PagerDuty is only a $150M revenue company! It’s unlikely that they will face constraints in terms of a limited market. Even if they get a mere 5% they would be 10x their current size.
The Business & Valuation
The company has done a great job of leveraging what we see as the “modern SaaS business model” that begins with self-service and builts rapidly as adoption is driven by increased usage and expanded offerings. Revenue growth has been strong and steady at close to 50%, last year the company did $118M in sales. Gross margins are excellent at 85%.
As expected operating margins are negative now but as the company scales up they plan to reach their target model of 20% operating margins.
Despite all the good execution, it’s interesting (and a bit puzzling) that newer products introduced in 2017 and last year do not appear to be “moving the needle” when it comes to sales. Both Incident Management and Real-Time Ops seem like attractive products but either the company is letting customers use these capabilities without charging for them or customers are using something else in this layer of the technology stack.
On the plus side, one can wonder – with such good metrics (140% dollar retention rate, low churn) imagine how much better they might be if existing customers start paying up for these product line extensions.
We expect lots of demand for $PD stock at the IPO. Our PFV below suggests a $30 near-term price but we could see things go well above that based on the current market. Given their high revenue growth, we could see $PD trade more in line with the higher growers in the comps table (below). In this case, it would be 22-25x current sales or $52/share.
In this “risk-on” market nobody wants to hear about the downside. But it’s worth mentioning that quite a bit of dilution will be coming into the shares over the next few years. We counted up about 30M worth – that’s a 40% increase. If we used that super-fully-diluted share count the $52/share number cited above would drop to $37/share.
PagerDuty Comps Table