Pegasystems' Earnings Still Marred by Currency and Model Transition; FVE Down to $55

Narrow-moat Pegasystems reported third-quarter results that fell short of our revenue and profitability expectations as it continues to face material currency headwinds and the rapid adoption of Pega Cloud. When considering these factors, we remain confident in our view that Pegasystems’ long-term growth is rooted in the cloud transition and are encouraged by its cloud metrics in the quarter. Bears would point to poor top- and bottom-line performance and macroeconomic factors out of Pegasystems’ control. Bulls would focus on longer-term factors such as sacrificing revenue now due to increased Pega Cloud adoption for growth and stable revenue once the model transition is complete. We have lowered our growth and profitability estimates for the next couple of years, which drives our fair value estimate down to $55 per share from $74. While we see upside to the stock, we would prefer to invest in cleaner stories in this environment.