Downgrading Pegasystems’ Moat Largely on Concerns Over Appian Lawsuit; Maintain $55 FVE

Pegasystems reported strong fourth-quarter results and provided investors with healthy first-quarter guidance. However, we have reassessed the company’s moat rating and are downgrading Pegasystems to a no-moat rating from narrow, as we remain concerned about potential value destruction arising from the outstanding $2 billion legal judgment awarded to Appian. Litigation aside, our long-term outlook for Pegasystems’ products has not changed, as we still see strong evidence of high customer switching costs and view it as a potential candidate for a moat reconsideration hinging on the final settlement of the legal affair with Appian. Despite our moat downgrade, we are maintaining our $55 fair value estimate per share on the back of the strong results and guidance. With shares trading up to $45 per share after hours, we view shares as slightly undervalued but would prefer to invest in cleaner stories given the uncertainty involved.