What a brutal six months it’s been for Procore Technologies. The stock has dropped 29.8% and now trades at $45.26, rattling many shareholders. This might have investors contemplating their next move.
Is there a buying opportunity in Procore Technologies, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is Procore Technologies Not Exciting?
Even with the cheaper entry price, we’re swiping left on Procore Technologies for now. Here are three reasons you should be careful with PCOR, plus one 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 $1.44 billion in Q1, and over the last four quarters, its year-on-year growth averaged 14.9%. 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 13%, a deceleration versus its 26.6% annualized growth for the past five years. This projection doesn’t excite us and indicates its products and services will face some demand challenges.
3. Operating Losses Sound the Alarm
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.
Procore Technologies’s expensive cost structure has contributed to an average operating margin of negative 7.6% over the last year. Unprofitable, high-growth software companies require extra attention because they spend heaps of money to capture market share. As seen in its fast historical revenue growth, this strategy seems to have worked so far, but it’s unclear what would happen if Procore Technologies reeled back its investments. Wall Street seems to think it will face some obstacles, and we tend to agree.
Final Judgment
Procore Technologies’s business quality ultimately falls short of our standards. After the recent drawdown, the stock trades at 4.2× forward price-to-sales (or $45.26 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We’re fairly confident there are better stocks to buy right now. We’d recommend looking at our favorite semiconductor picks and shovels play.
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