On March 2, construction management and workflow platform Procore Technologies released an amended S-1 as it prepares to IPO. Procore first filed to go public more than a year ago, just before COVID-19 took its toll on the markets. Fearing uncertainty, management decided to postpone its public offering and instead went with a private investing round of $150 million at a $5 billion valuation.
So why exactly is this software business exciting enough to garner a $5 billion valuation? Let's take a look.
What does Procore do?
Procore is a cloud-based construction management platform. Construction is highly complex, labor-intensive, and requires constant collaboration among multiple stakeholders. With manual labor being such a critical component of each given project, construction has been slow to adopt digital solutions. Procore seems to be at the forefront of changing that.
Most construction projects require multiple teams to work together simultaneously. From general contractors to specialty contractors, to architects, and even owners, every project is going to require cross-team collaboration, and that's where Procore comes into play. The company helps its customers manage their entire project lifecycle, from initiating it to signing the closing papers.
The company also employs a land-and-expand model. Despite customers typically using Procore for its popular project management solution, 60% of its customers subscribe to three or more products, which include pre-construction, financial management, and resource management solutions. This holistic approach helped Procore deliver a net revenue retention rate of 107% in 2020, even during a year when many construction projects stalled or stopped altogether.
Construction is a massive market
Perhaps the most exciting part of Procore's business is the market opportunity. According to the company, the construction industry is responsible for about 13% of global economic output. While most of those dollars are spent on materials, labor, and land, among other things, software is emerging as a critical component of the construction industry. Companies in this space that are slow to adopt digital solutions will likely put themselves in a weak competitive position.
Currently, Procore estimates its total addressable market at roughly $9.4 billion per year. However, there's nuance to this estimate. Ever since Procore launched in 2002, there's been one major hindrance to the company's growth: lack of internet connectivity. Internet access is widely available at the office but not so much on the job site. This led many construction firms to rely on manual services such as pen-and-paper contracts, and some of these legacy systems are still in use. However, since the proliferation of mobile devices, more and more companies are beginning to adopt the kind of digital solutions Procore provides.
Between the industry tailwinds and solid product execution, Procore has expanded its customer base at a compound annual rate of 33% since 2017, and it ended 2020 serving over 10,000 teams all over the globe. Revenue has followed suit, reaching $400 million in 2020. And thanks to the combination of strong customer and revenue growth, Procore also recently reported its first year of positive operating cash flow.
Watch out for the competition
Despite the strong financials and its first-mover status in the construction software space, Procore is not alone. Oracle and Trimble are two fairly popular competitors in the industry, but the most formidable challenger is Autodesk (NASDAQ:ADSK).
Autodesk is largely responsible for much of the digital design that goes into the construction process. So it shouldn't come as any surprise that following its $875 million acquisition of construction software provider PlanGrid in 2018, Autodesk has developed a suite of tools called Autodesk Construction Cloud.
However, with this rivalry in mind, it's also worth remembering that the competing services can play well with each other. If separate companies are working together on a project but using different platforms -- Autodesk versus Procore -- they can still easily share files and collaborate efficiently. This makes each respective platform fairly sticky and reduces the incentive or need to switch. Once a company has trained all its employees and field workers to use the Procore system, it's both costly and time-consuming to pivot to a new platform. This is why even with the rise in competition over the years, Procore has continued to see steady growth and minimal churn across the board.
All in all, Procore is a sticky, recurring-revenue business that should benefit from industry tailwinds in the coming decade. While I traditionally refrain from buying any IPO, Procore is certainly one to keep an eye on.