PagerDuty (PD): Is the AI-Driven Turnaround Justifying a 19% Undervaluation?

In the volatile world of SaaS, valuation is as much about narrative as it is about numbers. PagerDuty (PD), a once-dominant incident management platform, has seen its stock languish for much of 2024, with a year-to-date decline of 14% and a 12-month total shareholder return loss of over 22% according to a Yahoo Finance analysis. Yet, a recent 2% price uptick has sparked renewed interest, fueled by the company's aggressive pivot toward AI-driven automation. Analysts now argue that PD's stock is undervalued by 19%, trading at $15.49 versus a fair value estimate of $19.14, per that same Yahoo Finance analysis. But does this discount reflect the true potential of its AI strategy, or is it a cautionary tale of overhyped innovation?

The AI-Driven Turnaround: A Strategic Reassessment

PagerDuty's recent launch of an end-to-end AI agent suite-featuring over 150 platform enhancements-aims to redefine incident response in enterprise IT operations, as noted in a Yahoo Finance report. The suite promises to reduce on-call fatigue, automate repetitive tasks, and integrate seamlessly with existing workflows. These upgrades align with a broader industry trend: AI-native SaaS platforms commanding premium valuations. For instance, vertical AI SaaS platforms in fintech and logistics now trade at 8–12x revenue, driven by measurable ROI and high net revenue retention, according to a SaaS Group analysis.

However, PD's financials tell a mixed story. While revenue is projected to grow 5% year-over-year to $124.94 million in Q3 2025, according to a Yahoo Finance report, earnings per share (EPS) are expected to decline by 4% to $0.24, per that same Yahoo Finance report. This earnings drag contrasts sharply with the SaaS industry's median EV/TTM revenue multiple of 3.9x in Q3 2025, as reported in a PitchBook analysis, where AI-driven companies often secure premiums of 4.5x or higher, according to a SaaS Stock recap. For PD to justify its 19% undervaluation, its AI suite must not only improve operational efficiency but also translate into demonstrable revenue expansion or margin recovery.

Industry Benchmarks: The Rule of 40 and AI Premiums

The SaaS sector's valuation logic has shifted toward the Rule of 40-a metric combining growth rate and profitability-as the strongest predictor of enterprise value, according to a SaaS Stock recap. In Q3 2025, top-performing SaaS companies averaged a Rule of 40 score of ~50%, per that SaaS Stock recap, suggesting that operational efficiency is now as critical as growth. For AI-driven platforms, the stakes are higher: those demonstrating tangible outcomes-such as cost reductions or customer retention-can command multiples north of 8x revenue, according to a SaaS Group analysis.

PD's challenge lies in bridging the gap between its AI ambitions and current financial metrics. While its ARR grew 10% year-over-year to $483 million in Q3 2025, according to a PagerDuty earnings release, the company reported a net loss per share of $0.07 (GAAP) versus non-GAAP net income of $0.25, per that same PagerDuty earnings release. This discrepancy underscores the tension between short-term profitability and long-term innovation. Investors must weigh whether PD's AI investments will eventually yield the kind of scalable, defensible margins that justify a premium valuation.

Risks and Realities: Can the AI Narrative Deliver?

The AI-driven SaaS boom is not without its pitfalls. Rising competition from startups and incumbents alike threatens to erode PD's market share, while customer downgrades-common in maturing SaaS markets-could pressure revenue retention, as noted in a Yahoo Finance analysis. Moreover, the SaaS industry's median revenue multiple has contracted from 6.5x in 2023 to 3.9x in 2025, according to a PitchBook analysis, reflecting a broader shift toward profitability over growth. For PD, this means its AI strategy must not only innovate but also deliver measurable cost savings or revenue expansion to attract investors.

Conclusion: A Calculated Bet on AI's Potential

PagerDuty's 19% undervaluation may reflect both its current earnings struggles and the inherent risks of AI-driven transformation. Yet, in a sector where AI integration can command 8–12x revenue multiples, according to a SaaS Group analysis, the company's recent product innovations position it to capture a premium-if it can execute. The key will be whether PD's AI suite translates into improved customer outcomes, higher retention, and scalable margins. For now, the stock's discount offers a compelling entry point for those willing to bet on its ability to navigate the AI transition.