The software industry broadly has had a rough go of it as of late. In fact, the iShares Expanded Tech Software Sector ETF (IGV -2.75%), which closely tracks the returns of most U.S.-traded software stocks, has declined by more than 25% over the last four months.
With this rapid decline spanning the entire sector, many companies have taken part in the sell-off despite posting impressive financial results. Two, in particular, are Procore Technologies (PCOR -0.86%) and Dropbox Inc. (DBX -0.30%). Let's see why this recent turbulence is providing good entry opportunities for both of these companies.
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Procore
Procore provides cloud-based collaboration and workflow software to the construction industry. With the Procore platform, any stakeholder on a project from the architects to the general contractors can stay connected whether they're in the office or on the job site. The platform also spans the lifecycle of a construction project, from managing bids and workforce productivity to the company's flagship project management solution. All in all, Procore ultimately serves as a unified, digital system of record for the complex and fragmented construction industry.
Today, Procore is home to more than 12,000 customers, yet its management team still believes the company is in its early innings. In fact, on Procore's latest quarterly conference call, CEO Tooey Courtemanche stated that Procore's current market share of the U.S. general contractor space is only at 25%, with the remainder of the market primarily relying on legacy solutions. Additionally, according to McKinsey's Industry Digitization Index, construction is the second least digitized industry in the world, despite accounting for 7% of the global workforce and 13% of global output.
But Procore isn't just growing through new customers. It's also providing increasing value to its existing ones. In the most recent quarter, the number of customers contributing $1 million or more in annual recurring revenue grew by 50% as the usage of Procore's full suite of products grew. Additionally, Procore is consistently adding new products and integrations like it did through its recent acquisition of Levelset, which helps users stay lien compliant so they can get paid faster.
Although Procore's current enterprise value (market cap minus net cash) of about $7 billion may seem like a hefty price to pay compared to its expected 2022 revenue of $661 million to $666 million, the industries' reliance on legacy systems provides plenty of green grass for Procore. As systems in the construction industry continue to become more digital, I expect Procore will be able to grow its sales at a double-digit rate for many years to come.
Dropbox
Unlike Procore, Dropbox -- which provides content collaboration and document workflow software to teams of any size -- doesn't appear to have quite as much potential customer growth in front of it. By now, pretty much every organization uses some form of a content collaboration system, whether it's Google Drive or Microsoft's (MSFT -1.96%) OneDrive. This means that there isn't nearly as much low-hanging fruit in terms of new customers for Dropbox as there is for Procore. However, that should by no means preclude investors from owning shares.
In fact, a deeper look shows that Dropbox's business model has been quite resilient. Thanks to the platform's holistic suite of tools from digital signatures, to secure document sharing or even file searching, Dropbox has everything a team could need to work efficiently together. This focus on adding value to teams' workflows has also shown up in the financial results. Not only are Dropbox's customers sticking around, but in aggregate they've also demonstrated a willingness to pay more for it. In fact, this year, despite raising prices by nearly 4%, the company saw its customer churn decrease each quarter.
And since Dropbox doesn't require much additional cost for its new customers, the company has been generating more and more cash as it scaled over recent years. Over the last 12 months, Dropbox generated $708 million in free cash flow, which is 80% more than it produced two years prior.
With all this excess cash, Dropbox has also begun returning capital to shareholders in the form of buybacks -- and lots of them. Over the last year, Dropbox reduced its total shares outstanding by 8%, helping to increase the total free cash flow per share by about 57% over that same timeframe. But management isn't slowing the pace of its buyback either. Last quarter the board of directors authorized an additional $1.2 billion share repurchase program on top of its remaining $344 million. Combined, that's equivalent to 19% of the company's current market cap.
Between the steadiness of Dropbox's digital business and the significant margin of safety presented by the company's buyback program, Dropbox looks poised to deliver attractive returns for shareholders over the coming years.
