The construction industry is rapidly modernizing, and Procore Technologies (PCOR 0.39%) is at the forefront of this transformation with its cutting-edge software solutions. Its offerings are becoming increasingly indispensable as construction companies seek to streamline operations and improve efficiency. But what makes Procore such an attractive investment opportunity for savvy investors?
Here's why this company can achieve even greater success and why it is a wise choice for any investment portfolio.
It's an innovator in a largely untapped opportunity
Experts valued the global construction industry at $11 trillion in 2020, and it's projected to grow to $15 trillion by 2030. The growth is driven by increasing urbanization, infrastructure investment, population growth, and industrialization. So far, this massive industry has yet to embrace modern-day technology fully. Many construction companies are still stuck in the past, relying on outdated methods such as paper documents, email, fax, and spreadsheets. Even when construction companies adopt technology, it often has limited impact due to the use of outdated tools with limited functionality or construction stakeholders using multiple applications that fail to integrate properly. The highly fragmented and specialized construction industry is ripe for innovation with cloud-based solutions. As the chart below shows, construction is one of the last industries to enter the digital age.
Image source: Procore Technologies.
Procore is one of the early innovators of cloud-based solutions for the construction industry. The company started in 2002, and customers today use its cloud platform in over 150 countries. It can benefit from the construction industry modernizing in a few ways. First, the company can expand its customer base as more construction companies use cloud-based solutions. Second, it can find new ways to monetize customers by creating additional services based on the latest technology, such as generative artificial intelligence (AI).
Although Procore has many competitors, it is one of the few cloud companies offering a cohesive platform focusing exclusively on the construction industry. Its product suite covers a construction project's entire lifecycle, from pre-construction to building operations. Its cloud-based platform enables collaboration, communication, and data sharing among all construction project stakeholders, such as owners, general contractors, subcontractors, architects, engineers, and suppliers. Procore claims its platform can help customers reduce costs, improve project quality, increase safety, and deliver projects on time and on budget. The company has received top awards from several business technology review platforms.
Image source: Procore Technologies.
Procore is well positioned to capture a significant share of this growing market. The company has a strong product offering that addresses the needs of a wide range of construction professionals. It is also a leader in innovation, and the company constantly adds new features and capabilities to its software.
There are a few risks
The construction industry is cyclical, meaning the demand for construction services goes up and down with some regularity. Factors that affect the construction market include economic conditions, government spending, and interest rates. Unfortunately for Procore, rising interest rates and an uncertain economy over the last several years have squeezed demand for construction projects, threatening its business. Additionally, the company lacks profitability under generally accepted accounting principles (GAAP), something many investors detest in an uncertain economy. As a result, the stock price has been lackluster since the end of 2021.
When the company released its second-quarter 2023 report on Aug. 2, the stock fell 7%. One of the possible reasons why its stock price fell is that investors disliked management commentary about an increasing portion of the construction industry displaying conservatism. During the second-quarter earnings call, CFO Howard Fu said, "[W]e ... saw an increase in customers demonstrating cautiousness in construction volume commitments." Fu also said, "This has translated to longer sales cycles and smaller initial deal sizes." These statements signaled to investors that the company faces headwinds in its core market. If its customers continue to grow more conservative in future quarters, it could underperform management's revenue and profitability guidance. In addition to the above concerns, investor sentiment was not helped by revenue growth slowing over the last year and Loop Capital downgrading the stock after the earnings report.
Why you should consider buying Procore's stock
Although management identified a trend of some customers becoming more cautious, it also indicated that another portion of its customer base is expanding its business with Procore. Management also anticipates that the Infrastructure Investment and Jobs Act, Inflation Reduction Act, and the CHIPS and Science Act of 2022 will create new opportunities for the construction industry and drive more adoption of its platform.
As of the second-quarter report, the increased business activity in some areas has offset the declines in others, and although quarterly year-over-year revenue growth has slowed, it is still healthy at 33%. Additionally, growing profitability is always a great sign, with gross and operating margins rising in the past two quarters, as seen in the chart below.
PCOR Gross Profit Margin (Quarterly) data by YCharts
Leading economists expect the U.S. economy to steer clear of a recession, which is excellent news for the construction industry and Procore's mission to modernize the field. If you believe a bull market is on the horizon, now would be an opportune moment to contemplate purchasing a few shares.
