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Why Pegasystems Stock Gained 15% in April

What happened

Business management software specialist Pegasystems (NASDAQ: PEGA) outpaced the market last month as the stock rose 15% compared to a 4% jump in the S&P 500, according to data provided by S&P Global Market Intelligence.

The rally added to a good period for shareholders, who are up almost 50% so far in 2019 compared to a 15% increase in the broader market.

Image source: Getty Images.

So what

April's rally reflected growing enthusiasm on the part of investors that Pegasystems' business is becoming much stronger as it shifts toward cloud-based services. The company demonstrated some benefits of that move in an earnings report released in early May. That announcement showed that cloud revenue growth accelerated to 78% from 66% in the prior quarter as a full 70% of new contracts embraced the subscription service compared to 50% a year earlier.

Now what

The stampede toward cloud-delivered software licenses is depressing sales and profits for Pegasystems since the company is trading lump-sum cash for revenue that accrues over many years. The good news is this shift results in more dependable cash flow and, likely, higher profitability. But investors will have to wait until 2020 for a good idea of where Pegasystems' earnings power will land once the business has completely transitioned to the new model.

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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends Pegasystems. The Motley Fool has a disclosure policy.


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