The suite of products from this latest IPO is revolutionizing the cumbersome construction industry

C.Building it is a complicated process. Imagine building a house – there is a general contractor who communicates with plumbers, electricians, painters and many other people to make this happen. In fact, it takes an average of 22 subcontractors to build a house. Now extrapolate all of the tasks onto a huge project like the Las Vegas Raiders’ Allegiant Stadium. It’s easy to see how the enormous number of contractors, engineers, and architects required on a project of this scale can lead to misunderstandings, errors, and ultimately a waste of money.

That’s where Procore (NYSE: PCOR) occurs. Its platform enables all members of a project to access real-time updates and collaborate; Make sure everyone on the construction project is on the same page. In an industry that relies on paper and manual processes, a digital revolution is now beginning that has changed the rest of the world economy.

Attract customers

Procore’s software offers specific functions for project owners, general contractors and subcontractors. Even if a construction team stakeholder is not using Procore, a user can invite them to a project on the platform where they can use the software. This will give potential Procore customers a free trial to see if they’d like to incorporate it into their future projects.

Judging from Procore’s customer satisfaction ratings, they are likely to convert many of the free users to paid users. 97% of users rated it four or five out of five stars, 92% would recommend it, and 93% believe Procore is going in the right direction, according to the G2 2021 Fall Report. Word of mouth is critical to Procore as verbal communication is, and likely always will be, predominant in construction.

Procore still has a lot of leeway to attract customers. The company believes it captured only 2% of all construction industry logos available. Additionally, the Total Addressable Market (TAM) for construction management software ranges from $ 9.4 billion to $ 12.4 billion, depending on how the company calculates it. Of course, not one company will take advantage of this entire market opportunity, but Procore is positioning itself as the market leader. With existing customers, 43% subscribe to 4 or more of 13 products, so that an expansion is also possible there.

Image source: Getty Images.

Sample size for small revenues

With a public quarter behind Procore, it is difficult to gauge how the company will operate over long periods of time. Still, the company reported positive results for its second quarter with revenue growth of 27% and a GAAP gross margin of 79%. Typically for many newer companies, Procore is not profitable and has a net loss. That loss was made worse by all of the costs associated with going public. Free cash flow was minus $ 1.3 million, but with more than $ 1 billion on balance, Procore doesn’t have to worry about running out of money anytime soon.

One metric missing from their quarterly results was the net retention rate. Almost all Software-as-a-Service (SaaS) companies report a similar number that shows how customers are increasing their spend. Procore included this metric in their IPO roadshow slides, but it was missing from the second quarter results. In FY19 it was 117% and in FY20 107%. Management noted on the conference call that the retention rate was returning to pre-pandemic numbers, but did not provide the actual number. If management continues to fail to provide this number, investors should be careful. When management pulls a metric, it usually means that the benchmark is not being met.

Appropriate rating

As a SaaS company, Procore’s rating is best compared to others in this area. In addition, Procore is in the growth phase, so the usual price-earnings ratio does not make sense.

Compared to other industry-specific SaaS companies, Procore’s rating looks reasonable. nCino (NASDAQ: NCNO) offers bankers a platform with which they can optimize their business. Veeva Systems’ (NYSE: VEEV) cloud serves the life sciences sector. Both companies, like Procore, focus on a specific industry.

society

P / S

Growth rate

Gross margin

Procore (PCOR)

27.0

27%

79%

nCino (NCNO)

30.6

36%

59%

Veeva Systems (VEEV)

27.7

32%

73%

While Procore doesn’t quite match its competitors’ growth rate, it’s still in the same rating. It also has better gross margins, which means that Procore’s product cost is lower.

Procore has a compelling story and a huge opportunity. With back-to-back earnings reports providing investors with insight into the business, this should prove to be a solid investment. Until then, I wouldn’t go all-in with this company. It’s worth including it as a small position in a long-term growth portfolio to keep track of. After Procore publishes several quarters of results, risk takers can make it a bigger part of a well-diversified portfolio, provided Procore continues its execution.

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Keithen Drury has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Procore Technologies, Inc., Veeva Systems, and nCino, Inc. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.

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