Coupa Software's (COUP +0.00%) platform connects businesses with suppliers, helping them manage the way they spend money. This simplifies everything from purchasing inventory to making payments, creating operational efficiencies that lead to cost savings for customers and increased sales for suppliers.
Last year, Coupa stock surged 132%, easily outperforming the broader S&P 500. But investors haven't missed their chance yet -- here are five reasons Coupa is still a good investment.
1. Software-as-a-service mode
Coupa sells its software through a subscription model known as software as a service (SaaS), meaning it's distributed through the cloud. This has two benefits: First, it creates recurring revenue in the form of subscription fees, leading to a stable business. Second, SaaS businesses are cost-effective and highly scalable. This means Coupa can grow rapidly as its customer base expands, because the company incurs very little cost to support each additional customer.
That also keeps Coupa's cost of revenue low, which results in a high gross margin. For example, Coupa's gross margin was 62% in its fiscal third quarter (ended Oct. 31, 2020), indicating the company has the potential to be very profitable.
2. Value for its customers
The primary way Coupa creates value for customers is through cost reductions. The company's scale allows it to offer pre-negotiated discounts to customers, and it enables small buyers with similar purchasing needs to band together, using their collective buying power to get better prices.
Image source: Getty Images.
Customers also realize cost savings in other ways. For example, by digitizing the processes of procurement, invoicing, expense reporting, and supplier payments, Coupa's platform reduces duplicate or unnecessary purchases, simplifies invoice management, reduces the risk of fraud, ensures regulatory compliance, and helps control employee travel expenses. It even integrates multiple payment options through partnerships with companies, including JPMorgan, Mastercard, and PayPal. Likewise, by simplifying and automating various portions of these processes, Coupa helps its customers reduce labor expenses, which helps them save money and increase profitability.
Artificial intelligence plays a part in how the company analyzes data gathered across its platform. Coupa calls this "Community Intelligence," and it enables the platform to make recommendations that help customers better manage their spending. For instance, Community Intelligence helps businesses reduce supply chain problems by recommending low-risk suppliers. It also helps businesses measure their performance compared to peers, find cost savings opportunities, and identify potential fraud on invoices or employee expense reports.
Tying this together, customers would typically need a combination of competing products to achieve these same capabilities. But Coupa provides all of this functionality with one platform. That's why Coupa has been recognized as the leader in this market by both Forrester Research and Gartner. Investors should take note of this, because companies that provide meaningful value for customers are often rewarding investments.
3. Rapidly growing customer base
Between fiscal 2017 and fiscal 2020, Coupa's customer base grew 37% annually. And in the third quarter of fiscal 2021, Coupa reported 1,000 customers with annual account values exceeding $100,000, a 33% increase from the previous year. This marks an acceleration from 24% growth in the second quarter.
Also noteworthy, Coupa estimates that the average customer's lifetime value (the total amount of revenue the company realizes from a customer over time) is six times greater than the costs of acquiring that customer, meaning each new customer represents a 500% return on investment.
4. Strong network effect
Coupa's platform creates a network effect that helps protect its business from larger rivals like Oracle and SAP. As more customers join Coupa, it increases the incentive for suppliers to join, and as more suppliers join, it further incentivizes new customers to join, and so on. This advantage becomes even more powerful over time. For example, as Coupa's customer base expands, so does the company's power to negotiate pricing discounts, which creates further value for customers.
5. Solid financial performance
The ongoing focus on creating value for customers and the company's clear competitive edge have helped it grow revenue 186% and free cash flow 984% in the last three years -- much faster than its aforementioned competition. Investors should also note that while Coupa is not profitable, the company's ability to generate positive free cash flow is a good sign. It means Coupa can maintain and grow its business without needing to issue more debt or equity.
Data by YCharts.
Despite this strong growth, the company's trailing 12-month revenue was just $490 million -- that's less than 1% of its $56 billion market opportunity, according to management. In other words, Coupa still has plenty of room to grow in the coming years.
A final word
Investors should pay attention to Coupa's customer growth in the coming quarters. This metric is the primary driver of revenue and a key component of the company's competitive advantage. If growth slows, it could be a sign that the company is encountering challenges as it scales the business.
However, Motley Fool co-founder David Gardner has a saying: Winners tend to keep on winning. That's why -- given Coupa's strong past performance and tremendous market opportunity -- this company still looks like a good long-term investment.
