Barclays has moved Pegasystems to an Overweight rating from Equal weight, saying the recent pullback in software shares has opened a valuation window for the company amid improving cloud dynamics and early momentum for its artificial intelligence products.
The bank set a $48 price target for Pegasystems, grounding that target on a multiple of 12 times expected 2027 enterprise value to free cash flow.
Shares of the company have slumped 36% year to date, according to Barclays, compared with a 21% decline in the IGV software index. Barclays framed that underperformance as reflective of broad investor concerns over how generative AI could disrupt established software businesses, but said Pegasystems is less susceptible to near-term disruption.
Barclays noted that Pegasystems specializes in enterprise decisioning and workflow software for complex processes, a segment the bank believes is unlikely to be quickly upended by generative AI.
The brokerage highlighted several operating metrics from Pegasystems' most recent quarter as evidence of improving revenue trends. Total annual contract value rose roughly 14% year over year in constant currency, while Pega Cloud annual contract value grew about 28%. Cloud subscription revenue increased approximately 29%, an acceleration from the prior quarter.
Remaining performance obligations also showed strengthening. Current RPO was up about 20% and total RPO rose about 28%, Barclays said. Overall revenue for the quarter increased 2.7% from a year earlier, a slowdown from the prior quarter when term license revenue had provided an outsized boost.
Term license revenue declined 13% but nevertheless beat expectations, and unadjusted free cash flow came in at $152.4 million, above consensus forecasts.
On valuation, Barclays said the stock is trading at about 9 times expected 2027 enterprise value to free cash flow, a level the broker views as inconsistent with a company that is delivering double-digit contract growth and gaining cloud momentum.
In supporting its upgrade, Barclays also cited early traction for Blueprint, Pegasystems' AI product, as part of the rationale for improving medium-term revenue prospects.
Sector impact: The move touches software and cloud infrastructure markets, and has implications for investors focused on enterprise application software and AI-enabled workflow tools.
Analyst view: Barclays' change reflects a valuation opportunity driven by a significant year-to-date share price fall and a set of accelerating cloud and contract metrics.