Why Pegasystems Stock Dropped After Earnings
Key Points
It's no mystery why Pegasystems dropped today: Earnings fell by 2/3.
Free cash flow is down a bit as well.
Pegasystems has a target for 2028 FCF. If it can hit it, the stock will be very cheap.
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Pegasystems (NASDAQ:PEGA), the customer service software stock, slipped 3.6% through 1:30 p.m. ET Wednesday after missing badly on earnings last night.
Analysts had forecast Pegasystems would earn $0.49 per share on $421.8 million in sales in Q3, but the company actually earned only $0.35 per share, and its sales came in below $393.4 million.
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Pegasystems Q3 earnings
Pegasystems grew its sales 3% year over year in Q3, but its GAAP profits plunged 68% and earnings per share 67%. Not only did Pegasystems miss on earnings -- its "$0.35" profit was only a non-GAAP number; actual earnings calculated under generally accepted accounting principles (GAAP) were only $0.08 per share.
Despite the disappointing results, CEO Alan Trefler insists he's "confident in our long-term winning strategy to harness models like Claude, OpenAI GPT, and Gemini." CFO Ken Stillwell added that "our Q3 ACV" (that's annual contract value) "add was the strongest of the year and reinforces our confidence" that Pega is on the right track.
ACV rose 6% in Q3, twice as fast as revenue.
What Pegasystems investors need to know
Neither revenue nor "ACV" are most important for Pegasystems investors, however. Free cash flow is. Last year, Pega generated $490 million in such real cash profits, but the company's closer to $438 million, annualized, right now.
That values Pega stock at only 13x free cash flow after today's drop. Stillwell, however, predicts that by 2028, the company will grow its FCF number to "$700 million or more." If he's right about that, that's a near-term FCF growth rate north of 25%. And if he's right about that, then Pega stock is very, very cheap at a price-to-free cash flow ratio of only 13x.
Investors might want to consider that before selling today.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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