Procore Technologies: Attractive Growth Potential, But Concerns Remain

4 months ago

Digital exertion utilized for operation work

Procore Technologies (NYSE:PCOR) is simply a cardinal subordinate successful a increasing operation industry, which is ripe for disruption by cloud-based tools to amended process inefficiencies. However, a "hold" is recommended owed to respective factors. Despite precocious gross margins, Procore's profitability is hampered by precocious income and marketing expenses. The company's reliance connected third-party resources similar AWS could airs operational risks, and its precocious guardant gross valuation compared to the manufacture median signals overvaluation concerns. Procore's solutions contiguous promising potential, but these concerns necessitate caution earlier investing.

Company Overview

Procore, a cloud-native operation bundle solutions platform, was established much than 2 decades agone by the existent CEO with the imaginativeness to modernize task absorption successful the operation industry.

Procore was founded erstwhile integer task absorption successful operation was constricted owed to inadequate computing power. This resulted successful a challenging archetypal decade, impaired by the request for the wide usage of smartphones and WiFi connected operation sites. Nevertheless, the institution has flourished successful the past 10 years, championing the modulation from the accepted "pen and paper" exemplary to technology-based solutions.

Although its products are agnostic to the operation sector, Procore chiefly focuses connected non-residential operation but besides extends services to parts of the residential market, including multi-family construction.

Procore offers an array of cloud-based solutions to alteration and automate antecedently manual processes and workflows successful the operation industry. Its merchandise offerings autumn nether 4 categories: Project Execution, Pre-construction, Workforce Management, and Financial Management.

While initially targeting wide contractors, Procore has widened its scope to see specialty contractors and owners, expanding its lawsuit basal to implicit 15,000. The company's gross exemplary relies wholly connected recurring subscription revenue, providing a unchangeable and predictable income stream.

Stakeholders and Customers

Procore plays an indispensable relation successful the operation ecosystem, connecting cardinal stakeholders and servicing implicit 15,000 customers. These customers are broadly categorized into 3 main groups: wide contractors (~61% of ARR), specialty contractors (~14% of ARR), and task owners (~22% of ARR).

Project owners initiate and concern operation projects, oversee gathering plan with architects, engineers, and consultants, and are liable for hiring wide contractors to supervise the operation process. Notable owners see corporations, universities, authorities entities, and commercialized and residential existent property developers. Post-completion, these owners either manage, lease oregon merchantability the developed operation oregon whitethorn delegate these responsibilities to a 3rd party.

General contractors play a cardinal coordinating relation successful operation projects, tasked with fulfilling owners' requirements and supervising the enactment of specialty contractors and different work providers.

Specialty contractors, oregon subcontractors, bring specialized skills to the table, specified arsenic mechanical, electrical, plumbing, roofing, oregon factual trades. Hired by wide contractors, they transportation retired the lion's stock of operation enactment and are often liable for worldly procurement.

Product Evolution

Procore offers further functionalities that heighten its worth proposition. A notable diagnostic is its integration with third-party Enterprise Resource Planning (ERP) vendors, chiefly Sage and QuickBooks. This allows for seamless task accounting portion managing imaginable outgo overruns, an indispensable diagnostic successful the operation industry. The App Marketplace of Procore offers implicit 400 integrations, with astir customers utilizing astatine slightest one. These integrations encompass assorted solutions, including accounting, analytics, lawsuit narration management, and ineligible and compliance tools.

Procore strategically acquired Honest Buildings successful 2019 to amended cater to task owners, offering tailored fiscal management, task execution, and readying software. This lets owners presumption their portfolios crossed assorted projects, aiding concern decisions and timing.

Furthermore, the Procore level includes an App Marketplace, a one-stop store for third-party applications that seamlessly integrate with Procore. This not lone allows Procore to show lawsuit adoption trends but besides serves arsenic a pipeline for imaginable M&A opportunities.

Another almighty instrumentality is Procore Analytics, enabling customers to glean in-depth insights crossed aggregated information from each projects, products, and integrated accounting software.

Procore's SaaS-based platform's mobility is simply a important differentiator, providing a accordant idiosyncratic acquisition crossed desktops, mobile phones, and tablets. Given the office-and-field dynamic of the operation industry, this diagnostic allows for real-time accusation entree and 3D modeling capabilities on-site.

Looking ahead, Procore plans to absorption connected the payments facet of their platform, with the instauration of "Procore Pay," acceptable to motorboat aboriginal this year. This diagnostic volition let customers to implicit the last measurement of the workflow wrong the level itself: outgo to subcontractors. Procore's attack to the payments process and aboriginal monetization opportunities suggests a promising maturation trajectory successful the future.

Construction Industry Opportunity

The operation industry, representing $11 trillion of planetary operation expenditure successful 2020 and accounting for 13% of planetary GDP, is expected to scope $15 trillion by 2030. However, the assemblage has traditionally struggled with inefficient practices and costly alteration orders that compromise task profitability and lend to carnal waste. McKinsey has ranked operation among the slightest modernized and digitized industries, lone exceeding the agriculture industry's digitization lag.

Procore stands to summation considerably from the industry's accrued demand, underscored by a fewer cardinal statistics. The IT fund for operation and infrastructure is little than 2% of revenues, indicating important imaginable for integer solutions adoption. Additionally, the yearly maturation complaint successful operation labour productivity has been beneath 1% implicit the past 2 decades, showing ample ratio betterment opportunities. Furthermore, the operation manufacture tin adhd $1.6 trillion to the planetary GDP annually done productivity gains, further emphasizing the imaginable for Procore's maturation successful the sector.

Lack of Digitization Has Led to Inefficiencies

Financial Overview

Procore's fiscal illustration exhibits a precocious gross margin, reporting an awesome 85% successful the archetypal 4th of 2023. The large components of its outgo of gross see hosting fees, implementation costs, and lawsuit support. However, the precocious gross borderline profitability is much than offset by an assertive outgo allocation strategy, with astir fractional of the full gross spent connected income and selling expenses, starring to a antagonistic operating borderline of -2% connected a non-GAAP basis.

Nevertheless, Procore shows important maturation potential, boasting charismatic portion economics. The company's full gross exhibited a year-on-year maturation of 34%, coupled with a steadfast nett retention complaint of 116%. Procore's gross exemplary is built connected an mean declaration magnitude of 20 months, with 38% of the ARR stemming from multi-year contracts.

The company's fiscal wellness is demonstrated successful its robust equilibrium sheet, marked by a debased debt-to-equity ratio of 7.5% and a speedy ratio of 1.4x. Furthermore, Procore has generated a affirmative escaped currency travel of $19 cardinal (9% margin) successful the archetypal 4th of 2023, underlining its unchangeable currency position.

Currently, Procore is overvalued astatine 10.5x guardant gross and 9.8x guardant terms to publication multiple, arsenic evidenced by Seeking Alpha’s existent valuation people of “F”.

Risks

Key concern risks associated with Procore encompass fluctuations successful operation spending, a sales-driven gross maturation model, heightened competition, and reliance connected third-party services. The existent high-interest complaint situation whitethorn pb to a pullback successful operation spending successful 2024 owed to tightening recognition conditions, posing a important risk. Procore's gross maturation depends heavy connected expanding its income team, and a nonaccomplishment to amended income unit productivity mightiness hamper projected gross growth. Furthermore, precocious income and selling expenditures situation the company's profitability, which could constrain its capableness to execute economies of scale. Additionally, accrued contention from different operation absorption tools and accounting bundle providers, specified arsenic Autodesk (ADSK), could hinder Procore's marketplace share. The company's implicit reliance connected third-party information centers specified arsenic AWS besides poses operational risks, arsenic immoderate disruptions could person a antagonistic interaction connected performance.

After examining Procore's operational and fiscal metrics, I counsel investors to follow a "hold" presumption connected the stock, fixed the equilibrium of imaginable opportunities and evident risks.

This nonfiction was written by

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Using a fundamental-based concern approach, I purpose to find companies that volition outperform the marketplace implicit a multi-year clip horizon. Opinions are formed done my probe of fiscal statements, valuation analysis, manufacture tailwinds, and overlooked details successful yearly reports. I person 7 years of nonrecreational acquisition successful Corporate FP&A, Treasury, and Asset Management, arsenic good arsenic a concern grade from Purdue University. Recommendations are for probe purposes lone and not concern advice.

Analyst’s Disclosure: I/we person nary stock, enactment oregon akin derivative presumption successful immoderate of the companies mentioned, and nary plans to initiate immoderate specified positions wrong the adjacent 72 hours. I wrote this nonfiction myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary concern narration with immoderate institution whose banal is mentioned successful this article.

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