Software companies make fantastic investments due to their favorable margin profile. They provide software, which costs little to make over the long run compared physical goods like cars. Superior margins allow software companies to expand quickly and return significant capital to shareholders once the market has been developed and profits optimized.
Two software companies to buy for the long haul are Shopify (SHOP -2.37%) and Procore Technologies (PCOR -1.81%). Both are still growing and provide software for two huge industries with expanding opportunities.
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Shopify: Software for e-commerce
Gaining an omnichannel presence is practically required for small and large businesses today. For many entrepreneurs, wading into the online waters can be a daunting task. Shopify simplifies this process by providing customizable websites, payment processing, and order management. Most startups don't have much capital; Shopify recognizes this and prices its basic plan at $29 per month. As the business grows, Shopify offers more advanced tools to fit its evolving needs, like marketing and order fulfillment.
Shopify has been a huge success, growing its trailing twelve-month (TTM) revenue from $389 million to $4.21 billion from 2016 to the third quarter in 2021. More than $162 billion in gross merchandise volume (GMV) was processed by Shopify over the last 12 months. Many businesses subscribed to Shopify's software during the pandemic so they could reach customers digitally. This tailwind brought so many new customers that it created tough comparisons for Shopify. However, it's still growing against a fantastic prior-year backdrop.
Shopify breaks its revenue into two main segments, subscription and merchant solutions. Subscription solutions are derived from monthly costs paid by customers for Shopify's software and were up 37%, making up 30% of total revenue. Its merchant solutions segment creates revenue by taking a slice of each product sold. This grew even faster at a 51% clip, mostly because of 31% GMV growth to $41.8 billion. Overall, Q3 revenue increased 46% to $1.12 billion.
Shopify is not consistently profitable, even though it had positive earnings per share (EPS) this quarter. It is also richly valued at more than 40 times sales. Both factors present risks, as the market can turn against unprofitable and expensive companies at a moment's notice. If investors are in it for the long haul, these points against Shopify become weaker as sacrificing profitability for growth means Shopify is capturing its maximum market opportunity.
Competitors like BigCommerce and Lightspeed exist but are nowhere near Shopify's size. BigCommerce made $59 million in revenue during Q3, and Lightspeed had $133 million in second-quarter sales -- neither anywhere near Shopify's revenue total. The e-commerce market is massive, so multiple competitors should be expected. As long as Shopify continues innovating and putting customers first, it shouldn't have an issue maintaining its lead.
As more businesses move online, Shopify will capture a large portion. E-commerce trends are in Shopify's favor, making it a great long-haul software company.
Procore: Software for construction management
The construction industry has been unaffected by the digital revolution longer than most industries. Mobile technology has only reached the levels necessary to be useful within the past decade. Procore is capitalizing on these innovations by linking all stakeholders on a construction project together.
Procore gives clear visibility and increased efficiency throughout all project phases. One customer found the bidding tool reduced three days of work into five hours. Budgets can be monitored in real time as contractors input expenses and changes occur. If a design changes, drawings can be sent out and the proper parties are notified, ensuring the build is accurate through its project management tool.
By cleaning up the communication stream, Procore estimates the construction industry can add $1.6 trillion in gross domestic product (GDP) globally through productivity gains. With a compelling use case, the software should almost sell itself. Procore does exactly that by letting paying customers add non-users to a project for free. Once the project is wrapped up, Procore believes it can convert many free users into paying ones after experiencing the software's benefits.
During Q3, Procore grew revenue at a 30% clip to $132 million. While it posted negative EPS, Procore did produce free cash flow of $6.5 million. Gross margin was a strong 83%, allowing Procore to generate strong earnings when it reaches maximum profitability. Procore added 456 net new customers -- new customers minus lost customers -- as well, growing its count to more than 11,500. During the summer, Procore estimated it had captured about 2% of logos in its addressable market, giving it plenty of room to expand.
Similar to Shopify, the construction management software industry has room for multiple winners. One of Procore's chief competitors is Autodesk's Construction Cloud. Both score the highest on G2's construction management software grid, with Procore scoring the best in the "high performance" segment and Autodesk's product inching out second-place Procore on the "market presence" axis. Procore is also highly esteemed by its customer base; 97% of users gave it four or five stars out of five and 92% are likely to recommend it. Rave reviews by its customers are just another feather in Procore's cap.
Unless growth begins slipping or external reviewers turn against Procore, it makes a compelling investment case. As Procore expands into France and Germany in 2022, investors should get excited as this $10 billion market cap company executes its vision in an industry projected to spend $14 trillion in 2025.
Both Shopify and Procore are excellent software providers in huge, expanding industries. If investors are looking for software companies to hold over the long haul, both present a strong investment case. Consider adding each to a portfolio if the volatility inherent with growing, unprofitable companies isn't worrisome.
