rewrite this title Procore Stock – A Massive Opportunity in Construction – Nanalyze

Construction spending represents 13% of global GDP, yet the construction industry is consistently ranked as one of the least digitized industries in the world. Every expert group who analyzes industry technological maturity seems to agree on this. There is low-hanging fruit everywhere. Blue ocean total addressable market waiting to be captured. Paper-based methods are the norm for around 40% of construction firms which represents a tremendous opportunity to create efficiencies. Says McKinsey:

The construction sector is one of the largest in the world economy, with about $10 trillion spent on construction-related goods and services every year. However, the industry’s productivity has trailed that of other sectors for decades, and there is a $1.6 trillion opportunity to close the gap.

If only there were a high-growth software-as-a–service (SaaS) firm targeting construction industry constituents. Turns out there is, and it’s called Procore Technologies (PCOR).

Revisiting Procore Stock

We last visited Procore stock four years ago and found the $11 billion company to be a compelling way to play the digitization of construction, though we had reservations about investing in a horizontal SaaS solution targeting a cyclical industry. Since then, they’ve managed to show impressive growth, though it’s now decelerating.

Today, you can get the same company at a $9 billion market cap instead of $11 billion. (More on this in a bit.) We didn’t miss much in terms of returns, but has the growth story stayed intact?

While our last analysis concluded that we didn’t want to invest in the construction industry during boom times, our recent look at Trimble’s inability to grow resurfaced Procore for consideration. Provided we can stomach the cyclical volatility surrounding the construction industry, could Procore provide us with some compelling vertical SaaS exposure?

In industries where there are large ecosystems of participants, vertical solutions make more sense. That’s because there is lots of breadth in terms of functionality that is unique to the industry. Not to mention, industry-specific big data that is quite valuable. Healthcare is another example of this. So while we might pass on a service industry vertical offering – think Toast (TOST) – the construction industry opportunity is large enough that we’re willing to look past the industry concentration risk. So let’s leave that factor off the table and examine the merits of Procore stock as a possible replacement for Trimble (TRMB).

Three Things to Consider

For any SaaS firm, we want to start with examining key metrics such as gross and net retention rates. For Procore, we’re particularly interested in “new logos.” All those construction firms using paper will reap huge rewards through digitization, but they will be very slow to adopt. We want to see lots of clients being onboarded every year and then we can upsell them later. Companies that have no digital solution presently represent blue ocean TAM that’s not being serviced by competition. The proverbial low hanging fruit. And that’s the next area to focus on. How formidable is the competition in this space? Is it just old dinosaurs like IBM and Oracle peddling mediocre onsite implementations of clunky software? Also, we’ll want to consider the current state of the construction industry.

Key SaaS Metrics for Procore

Last year’s investor deck is a rich source of information for investors as it segments the grand opportunity into three layers – size, geography, and type. The latter metric consists of three segments – owner, general contractor, and specialty contractor.

Now you can start to see some cool stuff. Around 50% of ProCore’s annual recurring revenues (ARR) come from general contractors in the United States and they’re growing 16% year-over-year. Contrast that with specialty contractors who make up 15% of ARR, but are growing faster at 22% year-over-year. Now the company can start making decisions about which segments will provide the easiest growth. They passively sell to all segments, of course, but some deserve more active focus than others. This is the language the company will use to describe their progress. Investors should understand it by reading through their very solid, albeit dated, investor deck.

While last year’s investor deck is an excellent source of information, the company fails to accompany their earnings releases with any presentations. That means investors need to work extra hard to find key metrics. For example, net retention rate (NRR) is buried in the 10-K. It was 106% in 2024, down from 114% the year prior. No wonder it’s buried. It ought to be around 120% for a growing SaaS firm. Maybe they’re just focusing more on new logos. A metric called “organic customers” shows new logos added each quarter based on the company’s internal sales and marketing efforts, not via acquisitions. We had Grok scrape this number off each press release so we could plot it over time.

Procore might say this slowing growth of new customers relates to the cyclicality of the industry. And perhaps they’re right.

The State of Construction

Four years ago, we said, “this is the type of company you want to buy when there’s a recession, not when times are good.” According to the below chart provided by Procore, now would be a better time to invest than four years ago.

However, a look at construction employment paints a different picture. Says the BLS:.

In 2023, construction employment reached an all-time high of 8.0 million—surpassing the previous peak employment level from 2006, which was about 7.7 million. The construction industry is projected to grow 4.7 percent from 2023 to 2033, faster than the 4.0 percent projected for all industries.

So maybe it’s all just ramping up for the next growth cycle.

Another consideration would be the TAM size. The “construction management software” opportunity is estimated to be anywhere from $10 to $20 billion which isn’t that big. We prefer opportunities $100 billion or bigger. But that might not take into account all the adjacent offerings that could be sold to such a large industry. If Procore becomes the engine of construction, it will enjoy strong network effects, and each of their segments can be sold adjacent offerings.

If these customers are still conducting business on paper, what must the rest of their organizations look like? Accounting, human resources, B2B payments, these are all areas which Procore could expand into as they scale. The investor deck lists out functional areas for expansion while noting that their largest clients are those who have adopted more modules.

For each of the above areas Procore needs to consider competitive offerings in what is likely to be a quite fragmented set of legacy software offerings.

The Competition

While our previous piece mentioned competitors like Autodesk and Oracle, it’s always tough to get market share estimates for a platform like Procore. That’s because each component often requires its own competitive analysis. Procore attempts to address this with some slides that show the percentage of deals they are winning against the competition.

It could be that Procore is feeling pricing pressures from the competition, and this slide is meant to assure investors that the competitive solutions just aren’t as good as Procore. That’s very important. Procore has gross margins around 80%. They can compete on cost. What we need to be absolutely sure of is that their platform – at a holistic level – is better than what the competition has to offer.

Perhaps the most important metric to monitor on the above slide would be gross retention rate (GRR) which looks at clients who move off their platform, and presumably onto a competitor’s platform. At 94%, that’s about as low as you want to see this go. One exception might be when the construction industry is seeing a downwards cycle and numerous firms are going out of business.

Some Thoughts On Procore Stock

The 2024 investor deck spells out a very compelling sales strategy that segments the world into dozens of opportunities. Each opportunity is assessed for growth potential and targeted accordingly. On paper this is quite compelling, and you don’t often see companies explain their sales strategies at such fine levels of detail. What this allows us to do is diagnose problematic areas of the business rather quickly (our focus is always on what could go wrong) and keep a sharp eye on progress. The deceleration of growth might be blamed on overall industry stagnation and that’s exactly when we want to be investing – right before growth ramps up again.

For whatever reason this is a volatile stock. That means you’ll want to use valuation ratios, not stock prices, when you set targets. Four years ago, Procore had a simple valuation ratio (SVR) of 25. Today, that’s right around our catalog average at 7. That’s a reasonable valuation for the growth on offer here. We’re currently holding Trimble because we chose them over Procore way back when. It may make sense to take the mediocre gains from Trimble and plow them into a reasonably valued stock that’s actually seeing double-digit growth. It’s just a question of whether they can start accelerating that growth rate again.

The biggest concern right now is probably their declining new logo addition rates which may be a symptom of industry cyclicality. Next up, their declining net retention rate which you could argue either way. On one hand, it’s low because they’re so focused on adding new logos. And that’s what we want! On the other hand, customers aren’t finding lots of value in their products, or they’re feeling pricing pressures from competitors, or even both.

Conclusion

Procore has come a long way since we first looked at the company four years ago. The same growth story is on offer at a dramatically reduced valuation. As we look to exit Trimble, Procore seems to be a suitable substitute given the massive blue ocean opportunity ahead. The average valuation seems to match the current cyclical status, according to Procore. That helps explain the slump in NRR and new logo additions. Or it could represent competing offerings that are better and cheaper. Let’s hope it’s the former.

As for Trimble, investors were fawning over their recent guidance raise. But if you run the numbers, it’s hardly impressive – a raise of less than three percent. A hint of promise, but it’s just not enough.