PagerDuty (NYSE:PD) shares jumped greater than 7% in premarket buying and selling on Friday as Morgan Stanley upgraded the cloud computing firm for a number of causes, together with its “resilient development” and “enticing valuation.”

Analyst Sanjit Ok Singh raised the agency’s ranking on PagerDuty (PD) shares to chubby from equal-weight and nudged the worth goal to $36 from $32, noting that now that shares have are available, it could be time for buyers to take a second have a look at the corporate.

“PagerDuty’s sustained development and ~800 bps margin growth has been rewarded by buyers, with the inventory outperforming friends solely down (25%) in [calendar 2022] vs. the broader software program group common down (45%) final 12 months,” Singh wrote in a notice to purchasers. “Importantly, sustained prime line development coupled with future margin growth seems underestimated by buyers.”

Singh famous that the corporate has grown at a compound annual charge of 32% over the previous two years and internet greenback retention charges have exceeded 120% for eight straight quarters. And although it is doubtless that PagerDuty (PD), like different software program firms, sees slower development this 12 months because of the weak economic system, it is doubtless that it’s going to maintain a minimum of 20% development for various causes, together with “substantial progress” shifting up-market; its position in responding to and resolving service incidents that may influence enterprise operations and make it extra useful to prospects; and a extra favorable aggressive setting within the $17B IT operations administration market.

“The stability in income stemming from a subscription mannequin has supplied the respiratory room for administration to execute on initiatives to enhance the price construction which has to this point translated to 800 bps of working margin enchancment in [estimated fiscal 2023],” Singh defined.

The analyst added that PagerDuty’s (PD) working margins might increase to be “effectively forward of consensus” and develop to eight%, 14% and 19% in fiscal 2024, 2025 and 2026, above the two%, 7% and 9% Wall Street is anticipating.

“We consider valuation at the moment undervalues the resilience of PagerDuty’s development in its core market and the power to quickly enhance FCF era given the corporate’s extremely enticing unit economics (85% GM, 90%+ gross retention) which ought to translate to a ‘Rule of 40’ (income development + working margin) monetary profile inside the subsequent few fiscal years,” Singh added.

Last month, Morgan Stanley listed PagerDuty (PD) among the many almost definitely takeover targets for personal fairness corporations.

Analysts are largely bullish on PagerDuty (PD). It has a HOLD ranking from Seeking Alpha authors, whereas Wall Street analysts charge it a BUY. Conversely, Seeking Alpha’s quant system, which persistently beats the market, charges PD a HOLD.