Procore’s 15.4% return over the past six months has outpaced the S&P 500 by 6.6%, and its stock price has climbed to $76.36 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now still a good time to buy PCOR? Or is this a case of a company fueled by heightened investor enthusiasm? Find out in our full research report, it’s free.
Why Does Procore Spark Debate?
Used to manage the multi-year expansion of the Panama Canal that began in 2007, Procore (NYSE:PCOR) offers a software-as-service project, finance, and quality management platform for the construction industry.
Two Positive Attributes:
1. ARR Surges as Recurring Revenue Flows In
While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.
Procore’s ARR punched in at $1.18 billion in Q3, and over the last four quarters, its year-on-year growth averaged 24.7%. This performance was impressive and shows that customers are willing to take multi-year bets on the company’s technology. Its growth also makes Procore a more predictable business, a tailwind for its valuation as investors typically prefer businesses with recurring revenue. 
2. Operating Margin Rising, Profits Up
While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.
Over the last year, Procore’s expanding sales gave it operating leverage as its margin rose by 18.7 percentage points. Although its operating margin for the trailing 12 months was negative 9.7%, we’re confident it can one day reach sustainable profitability.
One Reason to be Careful:
Cash Flow Margin Set to Decline
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Over the next year, analysts predict Procore’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 14.1% for the last 12 months will decrease to 10.7%.
Final Judgment
Procore has huge potential even though it has some open questions, and with its shares outperforming the market lately, the stock trades at 9× forward price-to-sales (or $76.36 per share). Is now the right time to buy? See for yourself in our full research report, it’s free.
Stocks We Like Even More Than Procore
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