In the 21st century, almost all branches of heavy industry are actively adopting digital technologies. As we understand, the main goal of such changes is to increase labor efficiency. The construction industry stands apart, where a significant proportion of manual labor remains.
In addition, a constant problem for the entire sector is the delay in the delivery of facilities due to poor interaction with related enterprises. This, in turn, often leads to higher construction costs for residential and commercial properties. Construction companies are in dire need of digitalization of the processes of interaction with suppliers.
Company Procore Technologies developed a Saas platform for managing the construction of facilities of any complexity. The company’s IPO will take place on the NYSE on May 20, and trading will begin the next day under the ticker “PCOR“. Let’s analyze in more detail the business model of Procore Technologies and find out how interesting this issuer is for investment.
Business Procore Technologies
Procore Technologies was founded in 2003 and is headquartered in California. The company employs 1,911 employees under the leadership of the founder and CEO Craig “Tooey” Courtemanche… He previously ran a consulting company Webcage, which provided expert services in the software industry. Key investors were ICONIQ Capital and Bessemer Venture Partners: they own 44.3% and 14.9% of the company’s shares, respectively.
In the construction industry, the growth rate of labor productivity is about 30% lower than the global indicators in other areas. This is the price of the lack of modern coordination and planning tools. According to the report Deloitte, construction companies invest in IT half as much as the average company from other industries. More than 50% of all plan changes are caused by poor communication with contractors. In addition, the construction industry accounts for nearly 20% of worker deaths, according to the US Department of Labor. Thus, the sphere is in urgent need of modernization in terms of governance.
Procore Technologies has created cloud-based construction management software for residential, commercial and specialty real estate. The company’s product comprehensively solves the above problems of construction companies. The platform is available on smartphones, tablets, laptops and desktops. The head of a construction company, using his gadget, can control the entire construction process and the course of negotiations with suppliers. We can conditionally highlight the following platform modules:
- Procore Quality & Safety. Designed to control safety systems and the quality of work performed.
- Procore Bid Management. Designed for accepting applications for construction projects, allows you to form package offers.
- Procore Project Management. This module is used by architects who can track design steps and make edits to individual drawings.
- Procore Design Coordination. It is used by designers who try to take into account all edits in order to avoid subsequent alterations at the request of the customer.
- Procore Field Productivity. This is a module for construction contractors. The main task is to avoid interruptions in the supply of building materials.
- Procore Capital Planning. It is intended for the management of construction companies that carry out strategic planning.
- Procore Portfolio Financials. Add-on for accounting, which allows you to control construction estimates and budget execution.
- Procore Analytics. Allows you to carry out financial planning and consolidate information about all objects in a single database.
The company’s platform has an open API, which allows it to be integrated into consumer software (180 applications are supported). Therefore, among the clients of the company we see both small construction companies and large developers.
In 2019, 1.3 million users were registered on the platform. Each subscriber can distribute the company’s product at a new place of work – word of mouth is launched. Hence the rapid growth of Procore Technologies’ customer base. From 2017 to 2019, the number of customers grew from 4,310 to 8,506 – a relative increase of 97.35%. The number of users with an average check over USD 100 thousand during the same period increased from 230 to 655. In 2019, the company received the prestigious Forbes Cloud 100 Pledge 1% Impact award.
Taking into account the volume of the construction market in the USA, which is in dire need of increasing the level of digitalization to stimulate labor productivity, it can be assumed that the company’s product will find its consumer.
Market and Competitors Procore Technologies
According to research Frost & sullivan, the company’s address market is USD 9.4 billion. Deloitte believes that up to 1.5% of the costs of construction and repair companies by 2024 will be in IT technology. In this case, the address market will grow to 15 billion USD. The urbanization process is gaining momentum in developing countries, which will strengthen the company’s position in the market.
Competitors of Procore Technologies are:
- Trimble (TRMB)
- Autodesk (ADSK)
- Jonas Software
Financial performance of the company
The company does not generate net income, so we will focus on the dynamics of changes in revenue. Procore Technologies has provided several forms of reporting, S-1 / A contains clarifications for the first quarter of this year.
Sales for the last 12 months amounted to USD 421.89 million. For the entire 2020, this indicator turned out to be equal to USD 400.29 million, a relative growth by 2019 – 38.42%. In 2019, revenue amounted to USD 289.19 million, a relative growth to 2018 of 55.12%. Thus, the average revenue growth rate is 46.77%.
In the first quarter of this year, the amount of sales is 113.94 million USD, the relative growth compared to the same period in 2020 is 23.4%. If the growth rates of the beginning of the year continue, then the revenue in 2021 may amount to USD 520.61 million.
Gross profit in the first quarter of 2021 compared to the same period in 2020 increased by 24.97%. The net loss in the first quarter decreased by 26.1%. With such dynamics at the end of the year, this figure could reach 42.73 million USD. Within 5 years, the company can go into profit.
Strengths and weaknesses of Procore Technologies
Now we can analyze the strengths and weaknesses of Procore Technologies. Let’s start with the positive, namely the benefits of investing in these securities:
- The volume of the company’s address market by 2024 may reach 15 billion USD.
- The company’s revenue growth rate exceeds 40%.
- The company’s client base has grown almost widowed in 3 years.
- The Procore Technologies product comprehensively solves the problems of its customers.
- Strong management of the company. ICONIQ Capital has a successful IPO experience.
- The company’s loss is declining.
The risk factors for investing in Procore Technologies stocks include:
- The company is unprofitable and does not pay dividends.
- Strong competitors.
- Sales growth rates are slowing down and are unlikely to be the same in the future 3-5 years.
IPO details and capitalization estimate of Procore Technologies
During the previous rounds of financing, the company raised USD 648.9 million. The placement underwriters were: Stifel, Nicolaus & Company, Incorporated, William Blair & Company, LLC, Piper Sandler & Co. Oppenheimer & Co. Inc., Goldman Sachs & Co. LLC, Canaccord Genuity LLC, KeyBanc Capital Markets Inc., JP Morgan Securities LLC, Barclays Capital Inc. and Jefferies LLC.
The company plans to raise USD 592 million from the sale of 9.5 million ordinary shares at a price of USD 60-65 per unit. If placed at the upper border of the price range, capitalization will amount to USD 8.9 billion.
To assess the upside for the company’s securities, we use the P / S (capitalization / revenue) ratio (multiplier), since Procore Technologies is unprofitable. On placement, the P / S will be 17.45. In the lock-up period, the figure can reach 25-35 for the sector of Saas platform developers. Thus, the growth potential of the company’s shares will amount to 43% (25 / 17.45 * 100%).
Taking into account the above, I can recommend this company for medium-term investments. Taking into account the current market situation, the position can be entered in portions.
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