Pegasystems, Inc. (PEGA) blew the door out in Q1:
Pegasystems reports Q1 EPS $1.53, consensus 50c
Reports Q1 revenue $475.6M vs consensus $357.0M. "Pega GenAI has dramatically transformed how we engage with our clients," said Alan Trefler, Pega founder and CEO. "Pega solutions and our approach to AI enables clients to accelerate progress in reaching their digital and legacy transformation goals." "We accelerated ACV growth and delivered record free cash flow in Q1 2025, reflecting the benefits of the subscription model," said Pega COO & CFO Ken Stillwell. "Operating as a Rule of 40 company allows us to focus on accelerating profitable growth while thoughtfully returning capital to shareholders."
Importantly, key metrics accelerated meaningfully, including its Annual Contract Value (ACV) growth which came in at 13%. Its key growth driver, the PEGA Cloud division, saw its ACV grow 23% Y/Y, a nice acceleration relative to the 18% PEGA Cloud ACV growth in Q4:
As a Rule of 40 Software Company, PEGA's multiple is quite reasonable, trading for only 4.5x likely forward numbers.
Last year when Pegasystems reported a blow out Q1, its backlog growth slowed, signaling slower quarters ahead:
Why is PEGA seeing such momentum?
Well, as AI apps begin to proliferate, Pegasystems software has a distinct advantage. Its low-code platform allows new apps to be developed and deployed faster, thereby lowering costs for companies utilizing its software.
Moreover, given that most organizations still only have 15-20% of their workflow automation processes in the cloud, this presents Pegasystems with a big runway for consistent long-term growth and accelerated cash flow generation.
PEGA’s Blueprint AI product was only released four quarters ago. In some ways, PEGA reminds us of Palantir Technologies, Inc. (PLTR) at its start. When PLTR's growth inflected four quarters ago, it began with green shoots in its commercial AI product. Because it took a few quarters for adoption to really kick in, PLTR's growth rate did not meaningfully inflect until the 2nd half of the year.
PEGA is now in a similar spot, 4 quarters into its Blueprint AI ramp. Even after crushing it in Q1, its backlog actually accelerated, up 21%. This is significant:
Unlike last year, when momentum slowed, with all the company’s metrics still accelerating strongly, we think PEGA is potentially on the cusp of a multi-quarter growth curve.
Here is what consensus looks like for this year and next. We think numbers are 20-25% too low:
At $100, PEGA will be trading for a $9.5B market cap on a fully-diluted basis.
We think it can re-rate to 6x just off of the Q1 blow-out, along with the strong increase in backlog. This gets us to $120, assuming Q2 is as strong as we are projecting due to PEGA’s strong backlog increase.
We are buyers of PEGA on the open and plan to add on dips to the low $80s.
A key element to watch today is the volume. We want to see the PEGA trade 4-5M shares. If we see volume surge to these levels, it substantially increases the odds $100 comes very quickly, even in this nasty tape.
Our conviction level is an 8. We are still in a bear market and there is macro risk that software deal-flow gets elongated. Also, the stock has a ton of resistance up to $100.
Stop Loss: Due to PEGA’s sterling fundamentals and its AI angle, we plan to utilize a 9% stop from our cost.
Longer-term, should PEGA's business really take off this year and its multiple expand to 10x, we could see $200 in 18 months.
If PEGA were to get half of PLTR's Price-to-Sales multiple, we would be looking at $300-$350 in two years.
Food for thought. But again, due to this nasty tape, we only plan to have a 5% position on in the name.
Conference call is at 8am. Take a look at the PEGA Investor Presentation for even more color.
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Disclosure: We are long PEGA stock and calls. We may change our positioning at a moment’s notice, without notifying you of any such moves.
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