3 Reasons Coupa Software Is a Buy

Last year, the coronavirus pandemic forced business closures around the globe, significantly disrupting supply chains. This translated into inventory shortages and reduced productivity across various industries, underscoring the need for more flexible and robust supply channels.

Coupa Software (COUP) has a solution. Its business spend management platform connects clients (buyers) to suppliers around the globe. In addition to providing supply chain security, Coupa helps its clients manage expenses and source inventory more efficiently. Not surprisingly, the stock is up 105% in the last year, but it this company has plenty of growth potential left.

Here are three reasons Coupa Software is still a buy.

Image source: Getty Images.

The market leader

Coupa has been recognized as the market leader in procure-to-pay suites (I.e. software that help businesses find and purchase inventory) by research firms like Gartner, Forrester, and the International Data Corporation (IDC). There are several reasons for this, but one of the most important is the company's unrivaled strategic sourcing solution.

Coupa Sourcing Optimization (CSO) is a patented tool that uses combinatorial optimization to hold complex auctions between suppliers and buyers. Specifically, Coupa's 7 million suppliers are able to enter bids on combinations of items, and Coupa's 2,000 buyers can optimize across price, quality, supply chain risk, and other criteria. The sheer number of possible combinations would make it impossible to determine the winner of these auctions without Coupa's algorithm.

Most importantly, CSO benefits both sides of the transaction: Suppliers are able to sell products on their terms, while buyers are able to source inventory within parameters that benefit them. This creates a network effect: As more suppliers join, the platform becomes more valuable for all buyers. And as more buyers join, the platform becomes more valuable to all suppliers. This should help keep Coupa ahead of its rivals.

As an interesting anecdote: The technology behind CSO is the same science that helped Paul Milgrom and Robert Wilson win the 2020 Nobel Prize in Economics, which was awarded to them for their work in combinatorial auctions.

Fast customer growth

Coupa's best-in-class solution creates significant value for its clients. For instance, using Coupa's strategic sourcing tool, one of the world's largest medical device, pharmaceutical, and consumer package goods companies was able to save $300 million in a single sourcing event last year.

Also noteworthy, the two largest retailers in the world -- Amazon and Walmart -- both depend on Coupa's platform to help source inventory. That's an impressive bullet point on this company's resume.

As a result, Coupa has added new customers quickly, jumping from 717 in fiscal 2018 to over 2,000 at the end of 2021. In fact, growth has accelerated over the past four consecutive years.

Source: Coupa SEC Filings. Note: Fiscal 2021 ended Jan. 31, 2021.

Also important, the lifetime value of the average customer is over six times higher than what Coupa spends to acquire them. That's a big return on investment, and it underscores the efficiency of Coupa's sales and marketing efforts.

Strong financial performance

Not surprisingly, Coupa's ability to add new customers at a quick pace has powered impressive financial performance on both the top and bottom lines.

Source: Coupa SEC Filings. Note: Fiscal 2021 ended Jan. 31, 2021. CAGR: compound annual growth rate.

For reference, Coupa's business is growing several times faster than rivals like Oracle and SAP. And given the company's strong competitive position and accelerating customer growth, investors should look for this trend to continue in the coming years.

A final word

As a final caveat, Coupa is not currently profitable and its stock trades at a pricey 33 times sales -- a far richer valuation than Oracle and SAP, which trade at 6 and 5 times sales, respectively. That's likely to result in volatility.

However, I don't think investors should be too concerned by these issues. Coupa has established itself as leader in a growing market, and it makes sense to extend that lead by investing heavily in growth -- that's exactly what the company is doing. I think Coupa is well-positioned to outperform the market for many years to come.