2023-07-03 12:13:57 ET
Summary
- Procore has demonstrated substantial financial progress, as its revenue soared to $214 million, reflecting a year-over-year growth of 34%, while also achieving an impressive gross margin of 85%.
- Procore has a well-diversified customer base, ensuring that a crisis in a single sector, such as the office sector, won't substantially impact their operations.
- Procore is thoroughly dedicated to broadening its user base and enhancing platform engagement.
- The competition with Autodesk adds uncertainties.
Business update
Under macroeconomic uncertainties, Procore Technologies, Inc. ( PCOR ), in the first quarter of 2023, has shown significant financial strides, with revenue reaching $214 million, marking a 34% increase year-over-year. Their gross margin was reported at 85%. GAAP operating margin continues to be negative at (32%), and the non-GAAP operating margin was considerably better at (2%). The company's cash operations generated an inflow of $29 million, with a free cash inflow of $19 million within the quarter. Procore added 601 new organic customers during this period, culminating in a total of 15,089 organic customers. The company expanded its offerings by introducing Procore Risk Advisors , a modern construction brokerage that offers advanced insurance solutions. Furthermore, the company secured the 14th spot among G2’s Top 100 Best Global Software Companies of 2023, demonstrating its strong market presence and competitive edge.
Procore Showed resilience under the real estate turmoil
Despite widespread concerns regarding the office and commercial real estate market this year, Procore has demonstrated resilience, achieving a 34% increase in revenue. The company acknowledges the downturn in office construction, which represents less than 5% of their US construction value. A key contributor to their recent growth surge has been the windfall from public infrastructure spending. We can see that Procore's diverse coverage of over 70 sectors—including lodging, commercial, healthcare, education, office buildings, public infrastructure, transportation, and more—offers a robust buffer against shocks in any single sector. Furthermore, in the face of macroeconomic uncertainty, Procore's management remains confident of continued growth. This confidence stems from their customers' prioritization of efficiency in construction processes during economically challenging periods.
Despite operating at a loss, Procore appears to be successfully cultivating its network effects.
Despite the current market climate typically being unfavorable towards unprofitable companies, I don't believe PCOR is an unsustainable money-losing entity. Since 2020 , it has maintained positive operational cash flow and carries minimal long-term debt, ensuring that future growth is not compromised. Share dilution has been effectively managed, with less than a 10% increase over the past eight quarters.
PCOR's business model harnesses network effects, encapsulated in their mission to "connect everyone in construction on a global platform." The accompanying chart illustrates a beneficial cycle that intensifies as PCOR expands. The company's strategy involves reinvesting its gross profits to attract more users and amass more data, thereby fortifying its market position. This approach allows them to tolerate present losses for potential future gains.
Procore business feedback (Procore presentation)
A potential concern lies in the fact that Procore's business is still predominantly concentrated in the US, accounting for 86% of its revenue. The global market represents only 14% of revenue, 1% lower than last year, which does not reflect the anticipated explosive growth. Given that construction is a highly localized industry, Procore needs to demonstrate its ability to compete in overseas markets in order to validate its large Total Addressable Market ((TAM)).
Autodesk is coming after Procore
Another major concern for Procore is the competition posed by architectural, engineering, and construction ((AEC)) industry giant, Autodesk ( ADSK ). Autodesk, a dominant force in the preconstruction market, has made significant investments in its construction toolsets over the past decade. With its vast customer base, Autodesk's design, modeling, and management products are utilized in nearly every project in the US and in a large part of the rest of the world. It's quite straightforward for them to bundle their construction cloud services for users, thereby streamlining processes. Autodesk now offers products such as Autodesk Build, BIM Collaborate, Takeoff, Doc, and BuildingConnected, all of which target the same functions as Procore. Autodesk has also shown clear intentions of viewing Procore as a competitor, as evidenced by their refusal to allow Procore to exhibit at their annual Autodesk University conference and the lack of integration with Forge.
In the last quarter, Autodesk's AEC segment, which includes Autodesk Build products, experienced an 8% growth. Although this growth rate is slower than that of Procore, Autodesk's management has highlighted that they are gaining substantial traction outside the U.S. where I think they may outperform PCOR. They have shared instances of securing significant contracts in competitive markets like Singapore and China, likely edging out Procore in these instances.
Price Actions
When it comes to price movements, the chart below depicts the characteristics of price action from October 17, 2022, to June 30, 2023. PCOR demonstrates more significant daily return fluctuations compared to the market average, with a standard deviation approximately three times that of the S&P 500. The majority of trading days have yielded positive results. The stock often experiences intraday shifts, predominantly fluctuating within a 2% range. However, in the event of particularly positive or negative news, one-day jumps or drops exceeding 10% are not uncommon.
Price actions (Author)
If we calculate the correlation ratio of PCOR prices to all major sector ETFs, PCOR is mostly correlated with sectors like Consumer Discretionary ( XLY ), Semiconductor ( SMH ), Homebuilders ( XHB ), etc.
Correlation (Author)
Bottom Line
On the whole, PCOR's stock isn't exactly a bargain with an EV/Sales ratio of 11.2X, especially when compared to ADSK's 8.7x. Looking at the historical performance of Trimble and Autodesk, PCOR seems overpriced. The market has undoubtedly set high expectations for PCOR, with a lot of growth already factored into the current price. For 2023, PCOR's guidance estimates revenue in the range of $908 to $912 million, reflecting a year-over-year growth of 26% to 27%. Assuming a sustained growth rate of 20% for the next five years, and 15% for the subsequent five years, PCOR's revenue could reach approximately $3.8 billion in a decade, slightly less than Autodesk's current sales. Given the current enterprise value of $8.62 billion, this would imply an EV/revenue multiple of 2.26x ten years from now. If considering a long-term perspective, the current price appears to be fair.
For further details see:
Procore Technologies, Inc. Sustains Momentum, Amplifying Its Construction Network's Reach And Scale