Is DOGE disrupting the U.S. Application Software sector?

Investing.com -- Concerns about government IT procurement changes tied to the Department of Government Efficiency (DOGE) are casting a shadow over U.S. application software companies, particularly those with significant exposure to federal contracts, according to Citi.

In a note previewing first-quarter earnings for Appian (NASDAQ:APPN) and Pegasystems (NASDAQ:PEGA), Citi analysts pointed to “a challenging NT [near-term] deal environment w/ some deal delays expected given macro uncertainty and potential DOGE disruption within fed.” 

Appian derives 24% of its revenue from the federal sector, while Pegasystems draws about 10%, Citi said.

The DOGE initiative, which is aimed at streamlining federal procurement, appears to be causing delays in deal activity, according to the bank.

“Our checks indicate significant NT disruptions in the vertical for software broadly and anecdotes of deal pauses starting in March,” Citi said. 

For Appian, the bank says, the disruption is compounded by leadership changes, with new CFO Serge Tanjga set to join in May. “We are lowering our ests and TP to $40 (from $53),” Citi noted.

Despite these concerns, Citi sees longer-term strength in both companies, citing “clear ROI-driven value props” and ramping artificial intelligence initiatives. 

The bank feels Pegasystems may be better positioned in the near term, with its GenAI strategy gaining traction. 

“Blueprints [are] continuing to ramp (new monthly visit record per digital footprint data in 1Q) and emerging agentic orchestration capabilities coming with AgentX,” Citi said.

Litigation between PEGA and APPN remains an overhang, but Citi believes the worst may be priced in: “We believe the bar has been sufficiently lowered for PEGA,” they wrote.

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Citi lowered its price target on Pegasystems to $107 from $119, and reaffirmed that DOGE-related disruptions could weigh on short-term sentiment across the sector.

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