Today we have a very speculative idea: take shares of software manufacturer Pegasystems (NASDAQ: PEGA), in order to make money on their rebound after a strong drop.
Growth potential and validity: 20,5% behind 16 Months; 71,5% behind 4 of the year; 11% per annum during 15 years. All excluding dividends.
Why stocks can go up: because they fell hard, and the company can be bought.
How do we act: we take shares now by 82,71 $.
When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.
No guarantees
Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.
And what is there with the author's forecasts
Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.
So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark. As with the investment idea in general, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.
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Investment editorial office
What the company makes money on
PEGA makes software for business management and automation of business processes. The company's annual report is full of technical details.
We can talk a lot about, what exactly does the company's software do?, but it's better to see its rich selection of stories of specific solutions for specific customers.: optimization and improvement of the data collection platform for the US Air Force, an AI-powered system to manage business operations from pharmaceutical giant AbbVie, automation of the technical support system for Anthem insurers. Think, you already understood, why do we need PEGA and its software?.
By segment, revenue is divided as follows.
Subscription — 79%. Access to company software, its update and technical support for money. Segment gross margin — 87% from its proceeds.
License for permanent use of the company's software — 3%. Selling pega software rights to customers for life. Segment gross margin — 99% from its proceeds.
Consulting — 18%. Training services for the company's clients, as well as optimizing and installing new software. Segment gross margin — 4% from its proceeds.
PEGA Revenue by Country and Region:
- USA - 57%.
- Other countries in the Americas — 5%.
- United Kingdom — 10%.
- Europe, Middle East and Africa excluding the UK — 16%.
- Asian-Pacific area - 12%.
The company is unprofitable, but it wasn't always this way.: losses are associated with the company's transition to a subscription business model and a cloud business.
Arguments in favor of the company
Fell down. Since September 2021, the company's shares have fallen in price from 142 to 82,71 $ largely due to, that the company did not meet the inflated expectations of investors for revenue. Think, that there is a good opportunity to make money on the rebound.
Demand. The conjuncture for the company's business is seen as extremely positive as short, and long distances: American, and not just American, the corporate sector in the face of rising costs and the eternal pandemic seeks to reduce costs and squeeze the maximum out of available resources.
And that's good for companies like PEGA., which is approximately the same solution and offers. The same fact will attract a mass investor to the company's shares..
Metamorphoses. The fall in revenue growth and the company's loss are associated with a large-scale transition to a new business model - to the cloud and to subscription.
At one time, such a giant, like adobe, experienced great difficulties and faced a drop in margins due to the transition to the cloud business and subscription model. And this decline lasted a very long time..
In the long term, changes in PEGA will benefit the company and its quotes.. Actually, the gross margin of the business is growing and the profit is not far off. Besides, put your hand on your heart, the company's revenue growth rate is still above average.
The company can be bought. Considering all of the above, it is extremely likely that someone larger will buy PEGA. This will also be facilitated by not the highest degree of unprofitability of the company - minus 6% from its revenue, - its relatively small capitalization - 6.75 billion - and a relatively moderate price - P / S 5,38.
By the way,, on a monstrously unprofitable Anaplan with a final margin minus 35% from the proceeds there was a buyer: the company is bought from P / S 15 for 10.7 billion with a premium 30% to its price. Against this background, PEGA looks like a much more interesting target for absorption..
What can get in the way
"Hot time puts its test". A rise in rates and a rise in the price of loans are coming - this is by default bad for all unprofitable companies and does not contribute to increasing the attractiveness of their shares..
PEGA has a considerable amount of debt: 1,177 billion, of which 485.404 million must be repaid within a year. The money at the disposal of the company may be enough to pay off urgent debts, but, taking into account its unprofitability and investment needs, I'd rather prepare for that, that the volume of debt will grow.
This will motivate the company to issue new shares., from which the value of existing shares can seriously fall. And i'm not sure, that in the current circumstances there will be sufficient demand for new shares.
The unprofitability of the company guarantees the volatility of these shares. AND, basically, the threat of bankruptcy will always be nearby.
Heritage. The company looks like a loss-making startup. But in the eyes of investors, it is not like that.: it's an old business for them., going through a period of transformation.
Therefore, the investor community is still not enthusiastic about these shares.: average annual revenue growth rates here are very good, but still do not amaze the imagination. This will have a deterrent effect on stocks..
What's the bottom line?
Shares can be taken now by 82,71 $. And then we have three options:
- wait for the stock to return to 100 $. Think, here it is better to prepare for 16 months of waiting;
- wait for the stock to return to 142 $. Here we should count on four years of waiting.;
- hold shares 15 years, while the company is transforming and turning into a software giant.
The idea is volatile due to the company's unprofitability – so don't touch these stocks, if you're not ready for it, that they will be shaken.
Another curious moment: company, despite its unprofitability, pays dividends — 12 cents per share per year. This is 0.15% per annum, therefore, I will not advise you to follow the news about a possible reduction in payments. Unlikely, that investors will start a mass exodus from these stocks, if they don't get these 12 Cents.
Although, in my opinion, a complete cancellation of payouts would be more than a logical move.: they take 9.84 million a year.
