Is PCOR Stock a Buy?

Software company Procore Technologies (NYSE:PCOR) opened at $84 per share in its IPO in 2021, well above the projected price of $67. Fast forward to the present day and the stock has lost much of that value and has fallen below $60 per share.

With the stock seemingly on sale, is PCOR a buy? First, let’s catch you up if you’re not familiar with the firm. Procore is a cloud-based SaaS company specializing in construction management software.

The company’s main business line involves selling subscriptions to its software products to construction contractors. Procore’s software allows customers to manage everything from design to finance, making it an end-to-end resource for construction professionals.

PCOR Revenues Up 40%

One of Procore’s greatest strengths is its recent revenue growth. In 2022, the company’s full-year revenues increased by 40 percent to reach $720 million. This trend appears to be continuing in 2023, as revenue rose 34 percent in Q1.

For the first quarter, Procore’s total revenues were $214 million. Management expects to generate $216 to $218 million in Q2, implying sustained year-over-year growth of roughly 25 percent.

Despite this rapid revenue growth, Procore has not achieved profitability. In the last fiscal year, the company reported losses of $2.02 per share. Net margin came in at negative 36 percent, while return on equity was -19.75 percent. Analysts currently expect the current rate of losses to remain steady through Q2.

Procore’s future growth picture is somewhat unclear. While it has demonstrated its ability to rapidly raise revenues, but the company does not have an immediate path to profitability.

Still, gross margins exceed 80 percent as a result of the low costs of the SaaS business model, the company’s bottom line remains deeply negative. In the last fiscal year, Procore sustained over $286 million in net losses.

What can be said with certainty, however, is that Procore is a market leader in a fast-growing industry. The construction software market is expected to grow at a rate of over 10 percent annually for the next several years, reaching a projected size of nearly $24 billion by 2031.

Given Procore’s position in the industry, it’s very likely that the company will continue to see its sales rise as demand for software solutions in the construction industry grows.

27.8% Upside for PCOR?

Analysts consensus target price for Procore over the next year is $75, implying an upside of 27.8 percent from the most recent price of $58.70. Even the lowest price forecast of $67 would give the stock a 12-month return of over 14 percent.

Because Procore has never turned a profit, the company can’t be valued using traditional earnings-based metrics. At 10.7 times sales, it trades at a high multiple to its current revenues.

Despite the company’s strong potential for future growth, it appears overvalued currently on a P/S basis. This seeming overvaluation, however, must be put into the context of a high-margin software company that could still see a significant period of double-digit sales growth ahead.

At $296 million, Procore’s cash reserve is also sufficient to cover its current obligations and operating losses. Investors should, however, be aware that this reserve has dropped significantly over the last two years.

At the end of 2021, the company’s reserve of cash and equivalents totaled over $586 million. If the company continues to draw down this reserve, its balance sheet could weaken over time.

Construction Set To Fall 4% This Year

Procore does have a big problem: lack of profitability. The company is currently valued at a level that assumes very high revenue growth, eventually leading to a positive bottom line.

If revenue growth slows due to macroeconomic conditions, competitive pressures or other factors, the share price could decline precipitously and saddle investors with hefty losses.

Growth may be impacted by a slowdown in the construction industry as a whole. Current projections suggest that construction output could fall by nearly 4 percent this year as slower demand, inflation, higher interest rates and a generally slow economy take their toll on new construction starts.

These conditions may make contractors less likely to invest in digital transformation, potentially slowing Procore’s customer acquisition efforts.

The company’s share price has also fallen recently following a rash of insider selling. In May alone, the company’s CEO, CFO and other key insiders have sold large blocks of Procore stock.

While insider ownership remains at an extremely high 39.2 percent, the recent selling trend could indicate lower confidence among executives about the company’s future prospects. Investors who choose to buy Procore should watch carefully for further deterioration of insider ownership.

Is PCOR Stock a Buy?

Procore’s investment thesis is deeply mixed, as it is a company with both significant challenges and a great deal of long-term potential.

Bulls point out that the stock has sold off massively since its IPO, despite steadily increasing revenues. Given the valuations of other SaaS companies, its high price-to-sales ratio is not out of line with its business model.

It also has the advantage of drawing most of its revenues from subscriptions, making its cash flows and expenses quite predictable. In 2022, the company’s retention rate was 95 percent. This suggests that Procore has built a stable customer base that will continue to deliver recurring revenues consistently.

On the bearish side, the company’s lack of profitability, premium valuation and high recent rate of insider selling all raise concerns about the prospects for PCOR share price.

Investors who buy today could also see substantial losses. This is especially true if the stock falls due to an eventual slowdown in the construction industry, which could affect Procore’s revenue growth for several consecutive quarters.

Ultimately, Procore’s potential likely outweighs the company’s risks in the long run. It should be noted, however, that this stock is best suited to investors with a high risk tolerance and a long time horizon.

Until Procore becomes profitable, shareholders must speculate on future earnings when pricing the stock. Pre-profit technology stocks can be volatile and quite risky. Still, Procore is one that could pay off for investors willing to stick with the company until it can generate positive earnings.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.