Progress Software: Riding the AI Wave with Strong Financials and Strategic Acquisitions

The AI revolution is reshaping software markets, and Progress Software Corporation (PRGS) has positioned itself at the forefront with aggressive innovation and disciplined acquisitions. Recent financial results underscore its success: a 46% surge in Annualized Recurring Revenue (ARR), a 28% jump in non-GAAP EPS, and a raised full-year outlook all signal a company thriving in the digital transformation era. Yet its stock trades at a valuation that seems disconnected from this momentum. Is Progress undervalued, or are risks lurking beneath the surface?

The Financial Engine: ARR Growth and EPS Outperformance

Progress's Q2 2025 earnings report paints a picture of a company firing on all cylinders. ARR hit $838 million, up 46% year-over-year on a constant currency basis, driven by its AI-powered digital experience and infrastructure solutions. This recurring revenue stream now accounts for over 80% of total revenue, a testament to the shift toward subscription-based and cloud models.

The diluted EPS of $0.39 showed modest growth (5% YoY), but the non-GAAP EPS of $1.40 surged 28%, excluding one-time costs like acquisitions and restructuring. This metric better reflects Progress's operational strength, as it excludes noise from its strategic moves, such as the Nuclia acquisition.

The company also raised its full-year guidance, projecting non-GAAP EPS of $5.28–$5.40, a 2.5% increase over prior expectations. This confidence stems from its Net Retention Rate of 100%, indicating strong customer loyalty and expansion—a critical metric for SaaS businesses.

AI as the Growth Catalyst

Progress's recent acquisition of Nuclia, a leader in agentic Retrieval-Augmented Generation (RAG) AI, is a masterstroke. RAG combines large language models with document search to deliver context-aware responses, a capability increasingly demanded by enterprises. Nuclia's technology will enhance Progress's data platform, enabling clients to build AI applications faster and more accurately.

This move aligns with Progress's broader strategy: leveraging AI to deepen its position in digital experience platforms (DXP) and data infrastructure. Its ShareFile cloud storage platform, now fully integrated, has already met synergy targets, and Nuclia's addition creates a compelling value proposition for industries like healthcare, finance, and retail.

Valuation: A Discounted Growth Stock?

Despite its strong metrics, Progress's stock trades at a forward P/E of 12.66, far below its trailing P/E of 50.2. This divergence suggests investors are skeptical of near-term earnings growth or are pricing in macroeconomic risks. Comparatively, peers like Oracle (P/E 37.0) and Microsoft (P/E 36.0) trade at higher multiples, yet Progress's ARR growth (46%) outpaces theirs.

The EV/ARR ratio of 4.95 further highlights the discount. For context, software leaders like Adobe (EV/ARR ~12) or Snowflake (EV/ARR ~10) command much higher premiums, even with slower growth. Progress's valuation implies it's undervalued relative to its AI-driven trajectory.

Risks to Consider

No investment is without risks. Progress's operating cash flow fell 53% year-over-year, and its days sales outstanding (DSO) rose to 53 days from 41 days, signaling potential working capital strain. Additionally, the Nuclia acquisition's long-term impact remains unproven, though its immaterial cost to near-term financials mitigates immediate risks.

Investment Thesis: Buy the Dip, but Monitor Liquidity

Progress's fundamentals—explosive ARR growth, industry-leading retention, and strategic AI bets—suggest its stock is undervalued. Analysts' “Moderate Buy” consensus and a price target of $63.50 align closely with current levels, but upside potential exists if cash flow stabilizes and Nuclia delivers.

Recommendation: Investors seeking exposure to AI-driven enterprise software should consider initiating a position in Progress at current levels. However, keep an eye on Q3 updates regarding cash flow and Nuclia integration progress. For the risk-averse, a wait-and-see approach until these metrics improve might be prudent.

In a market where growth stocks are under pressure, Progress Software stands out as a rare blend of strong execution, visionary strategy, and a compelling valuation. The AI wave isn't slowing, and Progress looks ready to ride it all the way to the top.