In his latest report, Wedbush analyst Dan Ives revealed his top AI picks for 2025. Among them was the firm Pegasystems (NASDAQ:PEGA). The software company already had a great 2024, with shares providing a total return of 91%. Wedbush, as well as other Wall Street analysts, remain bullish on the tech stock despite this. Analysts at Royal Bank of Canada (NYSE:RY) and Citigroup (NYSE:C) have updated their price targets in the past month. The average of the two implies upside in Pegasystems shares of 24%, as of the Jan. 8 close.
Below, I’ll break down exactly what Pegasystems does and provide an overview of its recent financial results. I’ll also detail what Pega needs to do to have a successful 2025.
Pega: Improving Customer Acquisition, Service, and Business Processes Through AI
Pega highlights three business problems that it works to solve. The first is improving customer engagement. Its AI-powered customer relationship management platform, Pega Customer Decision Hub, helps hyper-personalize customer experiences. It predicts customer behavior and suggests actions to help employees close sales. Ultimately, it is about improving customer acquisition and retention.
The company also works to help streamline customer service. The Pega Customer Service app improves the efficiency of handling inquiries. It uses AI-powered virtual assistants and industry-specific processes to do this.
The last is boosting efficiency through intelligent automation. The Pega Platform software lets companies analyze and automate their old workflows. The Pega Platform integrates with hundreds of other software applications. Employees can then use it to set up automation within the other types of software they use. Pega will essentially mimic the human action that someone would have needed to perform after this is set up. Customers can also build full-fledged applications using Pega Express.
A key aspect of Pega’s value proposition is that it is "low-code." This means employees can automate processes and build apps without coding knowledge. This can potentially greatly lower the amount that companies pay software developers, who have a median salary of $132,000. It also helps reduce the risk of miscommunication across departments. Someone working in human resources can build an application themselves exactly how they want it. They don’t have to worry about a software developer not properly translating their vision into reality.
Pega: Solid Growth Combined With Improving Profitability
Over the last twelve months, Pega has grown revenues at a respectable but not earth-shattering clip of 9%. Overall, the company has significant variability in its revenue growth each quarter. However, since Sept. 2023, the company has made significant progress in its profitability. Its last-12-month gross margin increased by over 200 basis points.
Its last-12-month operating margin and net income margin were both around 0% in Sept. 2023. Now, they sit at nearly 12% and over 7%, respectively. Its free cash flow is nearly double year to date in 2024 versus 2023. In Q3 2024, its backlog was also 17% higher than a year before. However, since the beginning of 2024, backlog growth has somewhat stagnated.
Pega: Needs Further AI Implementation and Innovation to Win in 2025
Pega’s ability to have a successful 2025 relies on the bet that enterprises will make strong pushes to implement AI. Given that most still believe we are in the early phases of AI, this is likely to be the case. Much of Ives’s positivity on these AI names comes from his belief that AI is still “in the second inning” of its journey.
Another key component of Pega’s success will be its ability to continue innovating and creating products that customers can get more value from. The company’s GenAI Blueprint tool is an example of how it did this in 2024. The tool allows companies to analyze their legacy processes and rethink how they are set up.
Companies define the problem they want to solve and input legacy data. Using industry best practices, Pega uses AI to create starting points for building a new application. It then walks the user through the process of building the application and what specific things it will automate. The new blueprint feature helped Gartner (NYSE:IT) name Pega a leader for Enterprise Low-code Application Platforms (LCAP).
Pega has a lot going for it, including improving profitability, technology leadership, and being in the early stages of the AI movement. It is also trading at a middle-of-the-pack forward price-to-earnings ratio of 32x versus competitors. It certainly wouldn’t be crazy to see Pegasystems have another strong year in 2025.