Coupa Software's (COUP) stock surged 18% on Sept. 7 following the release of its second-quarter earnings report. The spending analytics software provider's revenue rose 18% year-over-year to $211.1 million, which exceeded analysts' estimates by $7 million. On a GAAP (generally accepted accounting principles) basis, its net loss narrowed from $91.5 million to $75.3 million, or $0.99 per share, which also cleared the consensus forecast by $0.22. On a non-GAAP basis, its net income declined 19% year-over-year to $16.5 million.
Coupa expects its revenue to rise 13% to 15% year-over-year in third quarter, and to increase about 16% for the full year. Both estimates were in line with analysts' expectations. Those headline numbers looked solid, but do they indicate that Coupa's stock can finally bounce back after losing about three-quarters of its value over the past 12 months?
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How fast is Coupa growing?
Coupa's cloud-based Business Spend Management (BSM) platform helps companies gain clearer insights into their spending patterns. It can also optimize a company's inventories, supply chains, and carbon footprint.
Coupa's revenue surged 50% to $389.7 million in fiscal 2020, which ended in January of the calendar year, as it signed on big customers like BMW, AstraZeneca, Rakuten, and Redfin.
Its revenue rose another 39% to $541.6 million in fiscal 2021 even as the pandemic spread, since companies still needed to cut costs and streamline their businesses throughout that crisis. Its growth was also boosted by its acquisitions of Kinaxis, BELLIN, Much-Net, and LLamasoft during the year. Its $1.5 billion acquisition of Llamasoft, an AI-powered supply chain design company, represented its largest-ever purchase when it closed in November 2020.
In fiscal 2022, Coupa's revenue rose 34% to $725.3 million. It slowed down its acquisitions following the Llamasoft deal, but it still acquired the travel bookings service provider Pana for $45 million at the beginning of the year. All those acquisitions made it tough to gauge Coupa's organic growth, and it initially declined to provide detailed organic growth rates or forecasts.
But during the second quarter of fiscal 2022, CFO Tony Tiscornia told investors its billings were still growing "in excess of 30% organically." But by the end of fiscal 2022, Tiscornia tempered those expectations with a forecast for "mid-20s organic billings growth" in the near term. It reiterated those expectations at the beginning of fiscal 2023.
However, Coupa's expectations for just 16% sales growth this year indicate its organic billings growth will also decelerate. During its latest conference call, Tiscornia said its cautious guidance factored in the "potential for additional macro headwinds" in the back half of the year. Its weaker growth in Europe could also continue to offset its stronger growth in North America.
Yet despite those challenges, Coupa is still consistently locking in larger customers. It ended the second quarter of fiscal 2023 with 1,519 customers, which generated over $100,000 in annualized subscription revenue -- representing 23% growth from a year earlier -- as its net retention rate stayed above 110%.
Its margins are slipping
As Coupa's sales growth cools off, its margins are being squeezed by higher costs. Coupa's adjusted gross margin expanded 390 basis points year-over-year to 74.1% in the first half of fiscal 2023, but its adjusted operating margin dipped 40 basis points to 9.3% and its adjusted FCF margin slid 200 basis points to 17.3%.
For the full year, Coupa expects its adjusted gross margin to rise about 60 basis points to 73%, but for its adjusted operating margin to slide 450 basis points to 7.8%. It didn't provide a firm outlook for its full-year FCF margin.
However, Coupa also just approved a new $100 million buyback plan, which raises some eyebrows because its margins are slipping and it isn't anywhere close to GAAP profitability yet. During the conference call, Tiscornia said that while the buybacks reflected management's "confidence" in Coupa's future, they would also "reduce net share dilution" from the stock-based compensation that consumed 27% of its revenue in the first half of fiscal 2023. Coupa's insiders aren't eager to hold those shares either: Over the past 12 months, they sold more than 600 times as many shares as they purchased.
Is it too cheap to ignore?
When Coupa's stock closed at an all-time high of $369.92 last February, it was valued at $26.9 billion -- or a whopping 37 times its fiscal 2022 sales. That nosebleed valuation was clearly unsustainable, but Coupa now trades at just six times this year's sales. But that's still not a bargain-bin valuation compared to those of its other cloud-based enterprise software peers.
Salesforce, which expects to generate 17% sales growth this year, trades at five times that estimate. Twilio, which is expected to generate 36% sales growth this year, trades at three times that forecast. Therefore, Coupa's stock could still tumble a lot further in this challenging market before it's considered undervalued -- so investors should avoid it for now and stick with more promising cloud software plays.
