Coupa Software Stock Is a Buy, Even Though Demand For Corporate Budgeting Software Slows

As with other cloud stocks that have raced higher this year amid the coronavirus market meltdown, Coupa Software (COUP) is a big winner. Up over 50% year to date after its fiscal 2021 first quarter (the three months ended April 30, 2020), some investors may feel that the boat may have been missed. 

That's not necessarily the case. Though high demand due to organizations adapting to work-from-home and shelter-in-place orders is now more than priced into the share price, Coupa Software is facing some headwinds along with its customers due to the current state of the global economy. And in spite of those headwinds, the company is still growing mighty fast. It is priced for an uptick later on, but this could be a highly profitable cloud software stock down the road.

For those with enough time to wait, Coupa is still a buy -- although an asterisk is needed.

Image source: Getty Images.

2020 takes a quick turn

Coupa is a business spend management and e-procurement software provider. Though it contends with far larger software companies in this space -- including SAP, Oracle, and WorkDay (among others) that offer some overlapping services -- Coupa has consistently been ranked a leader among its peers by tech researchers IDC and Gartner.  

There's nothing sexy-sounding about managing expenses, but recessionary times make it more important than ever before. Add to the mix the coronavirus-related lockdown that many find themselves in, and it's no wonder that Coupa's cloud-delivered service that enables spend management from remote locations (i.e., from home) is in high demand. After growing sales 50% last year, the company got 2020 off to a great start and built further on that momentum.  

Pp = percentage point. Data source: Coupa Software.  

The company did take a hit on gross profit margins (revenue less cost of service) as well as free cash flow (revenue less cash operating and capital expenses) due to some disruption from the pandemic as well as some payments related to its convertible debt. All told, though, it was a solid start to what has turned into an ugly year for many. 

It's all about guidance

Coupa announced a number of brand-new customers who signed onto its platform during Q1, and it expects more to do so as the year progresses. However, coping with the economic crisis is causing some delays. Though it has quite a few deals ready to go, the effects of COVID-19 are causing many organizations to pause for the time being before they switch over to Coupa's platform. As a result, the spend management platform thinks that inking new agreements will pick up later in the year as the crisis subsides.

As to specifics, second-quarter revenue guidance implies a 25% rise from a year ago, and full-year fiscal 2021 guidance a 26% increase. It's a more than respectable outlook, especially given the current business environment, albeit a sharp deceleration from what was just reported.

I wouldn't be shocked to see the numbers accelerate again in a quarter or two, though. After all, many organizations have had to freeze spending on new projects to manage cash flow crunches, but as the situation eases, spend management software like Coupa -- that can help not just manage expenses, but also reduce and benchmark them against the spending of competitors -- should come into focus for many who have been slow to update to the cloud. 

A note of caution -- this is a premium-priced stock. Based on full-year guidance, shares are trading for 28.5 times trailing-12-month revenue. And though the gross margin is high on services rendered as it is with other cloud computing firms, excess cash is reinvested back into the business to maximize growth. Simply put, I expect this to be a highly volatile stock going forward.

Nevertheless, Coupa has ample liquidity on its balance sheet ($706 million in cash and short-term securities, $572 million in debt that can be converted into stock) to continue growing. If you buy, my standard recommendation applies: Keep those positions small and leave yourself room to purchase more later on.