Procore Technologies’s stock price has taken a beating over the past six months, shedding 21.8% of its value and falling to $53.02 per share. This may have investors wondering how to approach the situation.
Is now the time to buy Procore Technologies, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is Procore Technologies Not Exciting?
Even though the stock has become cheaper, we're sitting this one out for now. Here are three reasons there are better opportunities than PCOR and a stock we'd rather own.
1. Weak ARR Points to Soft Demand
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 Technologies’s ARR came in at $1.40 billion in Q4, and over the last four quarters, its year-on-year growth averaged 14.8%. This performance slightly lagged the sector and suggests that increasing competition is causing challenges in securing longer-term commitments. 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Procore Technologies’s revenue to rise by 12.9%, a deceleration versus its 27% annualized growth for the past five years. This projection doesn't excite us and implies its products and services will see some demand headwinds.
3. Operating Margin Rising, Profits Up
Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.
Over the last two years, Procore Technologies’s expanding sales gave it operating leverage as its margin rose by 2.4 percentage points. Its operating margin for the trailing 12 months was negative 9.4%, and it must keep making strides to one day reach sustainable profitability.
Final Judgment
Procore Technologies’s business quality ultimately falls short of our standards. Following the recent decline, the stock trades at 5.3× forward price-to-sales (or $53.02 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better stocks to buy right now. We’d recommend looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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