Pegasystems Reports a Rough Quarter in a Turbulent Environment; FVE Down to $74

Narrow-moat Pegasystems reported disappointing second-quarter results which fell well short of our revenue and profitability expectations, as they endure a highly turbulent macro environment involving currency headwinds, inflationary pressure, and accelerating adoption of Pega cloud. With the consideration of these macro factors, the material shortfall this quarter, the heightened ramp of the cloud transition, and the lowered outlook, we have reassessed our model and are lowering our fair value estimate to $74 per share from $104. We are encouraged by Pegasystems’ resilience and hold our long-term view that the cloud transition is paving a runway for longer-term growth. We see Pegasystems as playing in an attractive space and think the firm flies under the radar of its larger automation peers such as ServiceNow and Salesforce. While we see meaningful upside for the stock from here, the significant miss and lumpy model transition gives us pause.