Late in 2021, I concluded that shares of Procore Technologies (NYSE:PCOR) were building the core. At the time, I concluded that the company has seen stable results since its public offering, amidst a nice bolt-on deal, yet I left with quite some concerns on the valuation.
A Recap
Procore went public in May 2021, as the company has a goal to improve safety, efficiency, and efficacy of the construction site, with software and services having huge potential to update old-dated practices in an old-fashioned industry. These prospects were aggressively priced in by investors at the time of the offering, as the company traded at a huge 20 times sales multiple from day one.
Procore aims to connect all stakeholders on the construction site with its software platform, including owners, general contractors, architects, engineers, and this across all stages of construction. Bid management, estimates, project management, quality & safety, BIM, financial, and invoiced include among the services facilitated by the platform.
The company generated some $400 million in revenues in 2020 from some 10,000 customers, involving a total of 1.6 million members who use the technology as an end user. Lack of communication and coordination is very painful as the capital intensity of the construction industry often results in huge costs and time overruns as well as safety concerns. The fee structure, in which the owner pays a fixed fee, creates no price hurdles to drive adoption, with an average project totaling some 150 participants.
The company went public at $67 per share, granting the business an $8.6 billion valuation, including a billion net cash position. This valuation was huge in relation to a $400 million revenue number in 2020, on which it posted an operating loss of $58 million, driven by high sales and marketing expenses. A combination of 19 times sales multiple, 40% growth and losses, as well as a run higher to $88 per share on the first day of trading, resulted in sky-high valuations, too high for me to get involved.
From the IPO to November 2021, shares have been trading flattish around $90 per share, as the company guided for 2021 sales around $500 million, with remaining performance obligations increasing by about a hundred million a year. Adjusted operating losses still came in at 4% of sales, resulting in large losses (certainly adjusted for stock-based compensation). Trading at $90, the $10.6 billion operating asset valuation came down to a 21 times sales multiple, for a very rich valuation with sales growth slowing down to 20% and change. Even a $500 million deal to acquire Levelset, which looked quite strategic, did not alter my cautious stance, certainly not as the acquired activities appeared to incur quite some losses.
And Now?
Fast forwarding from November 2021, moving up more than a year in time, we have seen shares fall quite a bit. Right now, shares are down to $55 per share, after having traded at a low around $40 per share over the summer.
Early in 2022, Procore posted a 29% increase in 2021 sales to $515 million, with non-GAAP losses posted at 6%. Fourth quarter sales growth accelerated to 33%, with revenues reported at $146 million, albeit that this included a $4 million contribution from the acquired Levelset activities.
In that sense, the 2022 guidance was a bit disappointing. The company guided for revenues to increase between 28% and 29% to $661-$666 million, with non-GAAP operating losses expected to widen significantly to 15-16% of sales, very disappointing. In May, the company posted a 40% increase in first quarter sales with non-GAAP losses posted at 12% of sales. On the back of a strong start to the year, the company hiked the sales guidance to $678 million, with non-GAAP losses now seen at 14% of sales.
The company posted another 40% increase in second quarter sales, albeit that losses increased to 15% of sales. Sales are now seen at $692 million, with losses set to narrow a bit further to 13.5%, albeit that sales are coming in at higher levels as well.
Third quarter sales rose as much as 41%, coming in at $186 million (for a three quarter of a billion run rate) with non-GAAP losses seen around 7% of sales, as the company kept hiking the guidance.
Given the shares issued to employees, the company has seen its share count dilute to 137 million shares, giving the company a $7.5 billion equity valuation, with net cash balances depleted to about half a billion, for an operating asset valuation of around $7.0 billion. Based on the current run rate, sales multiples have fallen to 10 times while growth is quite steady around 40%, albeit set to slow down in the fourth quarter to percentages closer to 30%.
That in itself starts to look a bit more compelling, if not for the fact that GAAP losses trend around $300 million per annum here, not showing much operating leverage, or any operating leverage at all.
Concluding Remark
The reality is that the combination of a falling share price and growing sales has reduced sales multiples a great deal. The issue at hand is that the lower valuations apply to the entire market, but more that realistic losses at Procore remain huge by all means, trending around 40% of sales. Losses are not showing many improvements, in fact, no improvements in absolute numbers at all.
Given all of this, we have seen a huge decline in the sales multiple, but this does not automatically translate into an appealing situation just yet, in fact, the contrary. The lower sales multiple comes amidst continued large losses, too heavy to even consider an allocation here.
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