What happened
Beaten-down software company Coupa Software (COUP) was bouncing back in a big way on Monday, up nearly 12% as of 12:30 p.m. ET.
While there was no company-specific news that came out today, another peer in the enterprise software sector was scooped up by a private equity firm over the weekend. After a 65% plunge from all-time highs about a year ago culminating in another brutal post-earnings sell-off last week, investors may be thinking Coupa could be the next software target to get scooped up.
So what
One would think Coupa's software sales would be booming right now, since its products help businesses optimize supply chains and connect businesses with suppliers. However, after a burst of digitization during the pandemic, some software companies are seeing things slow down as the economy normalizes. In addition, global inflation is pushing up interest rates, which are a killer for high-growth but unprofitable stocks such as Coupa. Yes, Coupa is posting break-even to slight profits on an adjusted basis, but when you factor in stock-based compensation, it still posted a $244 million operating loss according to generally accepted accounting principles (GAAP) in 2021.
It also didn't help matters that Coupa guided for underwhelming growth for the current year during its fourth-quarter earnings report last week, which came in well below analyst estimates. Decelerating growth and higher interest rates are a killer combination for Coupa and other stocks like it.
Still, with the stock now down below nine times this year's revenue estimates, could it be due for a bounce, or even a takeover? Over the weekend, private equity firm Thoma Bravo reached an agreement to acquire software peer Anaplan for roughly $10.7 billion in cash, representing a 30% premium to Anaplan's stock price as of Friday.
Anaplan, which helps companies plan their financial and operational planning, was of similar size and function to Coupa before the deal was announced. Therefore, with Coupa down so much from its highs, it's not unreasonable to think it could become the next target for an acquisition by private equity at a similar premium.
Image source: Getty Images.
Now what
As much sense as this makes, investors should never buy stocks on the mere rumor or potential for acquisition, as it may not happen. Investors should assess Coupa based on its own merits. Less than nine times forward revenue would have been considered cheap for a software stock not too long ago, but with interest rates on the rise, that may no longer be the case. At some point, software companies will need to either reaccelerate growth or show a clear path to GAAP profitability to regain the market's favor. That may not happen with Coupa in the near future.
