Coupa Software's (COUP) stock price surged 29% on Nov. 23 amid rumors of a potential sale to the private equity firm Vista Equity Partners. Vista already acquired the tax software provider Avalara for $8.2 billion in August, as well as the cybersecurity firm KnowBe for $4.6 billion in October.
There weren't any other financial details regarding the rumored deal, but Raymond James analyst Brian Peterson speculated that $68-$80 per share would be a "reasonable" price tag based on Vista's prior software deals. But is it too late to buy Coupa's stock, which has already jumped from the mid $40s to the low $60s in response to all that takeover buzz?
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Coupa's growth has been cooling off
Coupa's cloud-based Business Spend Management (BSM) platform enables large companies to optimize their spending patterns, inventories, and supply chains. Its major customers include BMW, AstraZeneca, and Redfin.
Coupa's revenue rose 50% to $389.7 million in fiscal 2020, which ended in January of the calendar year, but its net loss widened from $55.5 million to $90.8 million. Its revenue grew 39% to $541.6 million in fiscal 2021, and its core business remained resilient throughout the pandemic as large companies used its software to cut costs and streamline their operations. However, its net loss nearly doubled to $180.1 million.
A large portion of its losses in both years can be attributed to its acquisitions of Kinaxis, Bellin, Much-Net, and LLamasoft (which represented its largest acquisition ever at $1.5 billion). Those acquisitions expanded its ecosystem and boosted its revenue, but they also inflated its expenses and obfuscated its organic revenue growth.
Coupa's revenue rose 34% to $725.3 million in fiscal 2022, but its net loss more than doubled to $379.0 million, even as it acquired fewer companies. But in fiscal 2023, Coupa expects its revenue to grow just 16% to about $841 million. It expects its non-GAAP (generally accepted accounting principles) net income to rise approximately 4% to $65.5 million, while analysts expect its net loss to narrow slightly to $338 million on a GAAP basis.
Coupa mainly blames that slowdown on macroeconomic headwinds. It generated 40% of its revenue overseas last year, and the European market remains a weak link as it grapples with softer demand and longer upgrade cycles.
Why Coupa could be an attractive takeover target
Coupa's weaknesses are easy to spot, but it still has plenty of strengths. It ended the second quarter of fiscal 2023 with 1,519 customers that generated over $100,000 in annualized subscription revenue -- which represented 23% growth from a year ago -- and it maintained a healthy net revenue retention rate of more than 110%. Its adjusted gross margins have also held steady in the low 70s over the past several years, which suggests it still has plenty of pricing power.
If Vista takes Coupa private, it could restructure its business and eliminate its stock-based compensation expenses (which consumed 27% of its revenue in the first half of fiscal 2023) to stabilize its cash flows. Merging Coupa with its other software companies could also eliminate redundant departments and generate cost-cutting synergies.
In other words, Coupa might still be struggling as a stand-alone public company, but it could be a better fit as a subsidiary of a larger private organization. The integration of Coupa's platform into Vista's other software businesses could also eliminate the company's growing dependence on acquisitions over the past few years.
But investors shouldn't assume this is a done deal
A takeover of Coupa might make sense for Vista or other potential suitors. But at $63 per share, Coupa's enterprise value of $4.86 billion already values the company at 5 times next year's sales.
In the event of a takeover, we might see it bought out at a slightly higher premium. But if these rumored talks fizzle out, we could see Coupa struggle to justify its current valuation. By comparison, Coupa's larger cloud software peer Salesforce -- which is growing its top line at a similar rate -- has an enterprise value of just 4 times next year's sales.
Therefore, investors shouldn't buy Coupa's stock at these levels simply because it might be acquired. Buyout rumors are a dime a dozen, and they won't convince me to invest in Coupa -- which is still struggling with slowing sales and persistent losses -- when much better tech stocks are still on sale.
