$PD is of a slightly more risky nature, but exhibits relative strength. Therefore, we add it to our Top 3 Ideas for w/c 28th Dec 2020.


What's the business?

PagerDuty is an American cloud computing company specializing in a SaaS incident response platform for IT departments, that is designed to alert clients to disruptions and outages through machine learning and automation. It has been recognized by Forbes on its "Cloud 100".

What's going on?

PagerDuty last posted its earnings data on December 2nd, 2020, beating market expectations. The reported ($0.09) earnings per share (EPS) for the quarter, beating the consensus estimate of ($0.10) by $0.01.

The firm earned $53.77 million during the quarter, compared to analyst estimates of $52.61 million. Its quarterly revenue was up 25.8% on a year-over-year basis. PagerDuty has generated ($0.77) earnings per share over the last year.

PagerDuty CEO, Jennifer Tejada, detailed how the company is a beneficiary of the COVID19 pandemic,

Digital transformation is accelerating, becoming an imperative for our customers as they shift to an ecommerce led business model. We have emerged as the central aggregator for nearly all signals across the digital landscape from monitoring and observing security, logs, tickets, and even sentiment. PagerDuty is the first line of defense in protecting revenue.

What does this mean?

In spite of a sell-off in the run up to earnings, the Q4 results were received favourably and $PD gapped up an astonishing 22% as the market finally understood the vision that their CEO put forward.

Nevertheless, in spite of various upgrades, analysts remained divided and propose a wide range of price targets from $34.00 (Credit Suisse) to $57 (Monness Crespi & Hardt).

$PD provided an attractive entry point immediately after it's Power Earnings Gap, as it attempted to continue its rally, but instead briefly paused for three days as it found resistance at $41.60 and pulled back to that twice. Once it broke that on December 10th, it would have been a good point to enter, but we considered other setups at that time.

After that initial breakout, it continued to move higher, and for just over a week it's been struggling around the $46.75 area where it is meeting stiff resistance. It attempted a break-out twice, and failed on both instances, but keeps grinding up with higher lows. The inverted red hammer candle on Friday is a concern, so we are looking for a break and hold above $46.75 before we would consider an entry.

Options flow last week was fairly light, which is common for smaller companies. It had one February 19th 2021 call at a $55 strike, bought at spot price of $46.75, for a total premium of $39k. This is a minor signal given its size, but nevertheless adds to our bullish thesis.

Why should I care?

For your trade: a strong break-out candidate

$PD looks like it will attempt another breakout next week. The broader market will have a key role to play in this though, as even though it remains bullish in nature, the few days of trading before New Year are typically done on low volume and thus tend to have wild swings either up or down.

We should also note that, as mentioned, the candle on Friday was not convincing given that it is an inverted red candle. This may be a function of the market pulling back slightly at that time, but it implies that it'll either breakout, or drop further and potentially fall into a cup-and-handle pattern. Such a pattern is still bullish, but will extend the time duration for this trade.

Therefore, from our Top 3 this week, $PD is of a more risky nature and we should reflect this in our entry and exit criteria. Nevertheless,  we believe that a Fibonnaci 1.618 target of around $53.00 is feasible, which also falls within the range of analyst ratings and options flow.

Therefore, we recommend the following criteria to help you manage your trade:

Entry: $ 46.75 - $47.25
Stop Loss: $43.50
Initial Profit Target: $53.00

For your risk: an attractive risk / reward ratio

$PD exhibits relative strength compared to the broader market and has an attractive setup, with no near-time earnings date which may add additional risk. We thus feel fairly confident about the risk / reward for this trade.

Likelihood: 5 / 10
Risk / Reward Ratio: 1.9
Duration: 2 Months
Earnings Date: 17th March 2021

Please be aware that if your holding period extends over a future earnings date, the volatility of the stock rises and thus its risk profile inherently increases.

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