Procore – A Pure-Play Construction Tech Stock

If we had to guess the largest industry that was the furthest behind in technological advancement, we might say shipping. That’s because it’s an extremely fragmented operation, spanning 3,700 major ports and terminals worldwide. It’s also where startups like Flexport see a huge blue-ocean total addressable market (TAM) as they rush to capture as much of it as possible, all while trying to navigate barriers that created the technology gap in the first place. Another massive industry where things haven’t matured much for whatever reason is construction, the second most immature industry after agriculture.

According to McKinsey’s Industry Digitization Index, construction ranks second from last in digitization across all major sectors, ahead of only agriculture.

Credit: Procore S-1

Tomorrow’s smart cities need more sophisticated software tools for construction, and that’s where Procore sees a big opportunity.

About Procore Technologies Stock

Founded in 2003, Carpinteria, California startup Procore Technologies (PCOR) took in nearly $649 million in disclosed funding prior to their recent IPO. The last funding round in May of last year gave the company a valuation of $5 billion (according to the CB Insights unicorn ranch), and today they’re worth more than twice that. Shares of Procore began trading days ago, giving the company an $11.35 billion market cap. Procore’s mission is to simply connect everyone in construction on a global platform, helping to transform “one of the oldest, largest, and least digitized industries in the world.” It’s a massive opportunity. The construction industry represented approximately 13% of global gross domestic product and employed 7% of the global workforce in 2017. 

For those of you who take a shower after work, you’ve probably stepped foot on a construction site in some capacity, so you’ll quickly recognize the opportunity. Construction sites are a step back in time. You’ll regularly see physical copies of project documents stored in binders and boxes. Legacy software solutions reek of Windows 3.1 and aren’t easily accessible on any computer, smartphone, or tablet. The wide range of stakeholders on any given construction project means several hundred people need to be kept in the loop, something that rarely happens. Unsurprisingly, it usually takes a small miracle to get a construction project finished on time and under budget.

For those of you who take a shower before work, this handy slide should spell out everything you need to know about solving problems in the construction industry.

It’s easy to understand the holistic value proposition for a digital construction management platform, but there are a few key metrics we want to focus on. First is the amount of big data – 5.5 terabytes – that they flaunt, which is the direction this will quickly move towards. Imagine feeding all that big data to some hungry AI algorithms. Before you know it, predictive analytics for your project managers. They need it too. Rework cost the construction industry over $500 billion in 2018, or approximately 5% of overall construction costs, according to the 2018 FMI Report. On average, 52% of that rework was caused by poor project data and communication. According to McKinsey, large non-residential construction projects typically run up to 80% over budget and 20 months behind schedule.

It’s easy to see we have a big problem looking for a solution, but just how big is it?

Construction Technology Spending

The big-five consulting firms employ teams of consultants, each billing $800 an hour, who advise clients using rigorous research they’ve conducted in hopes of finding ground truth for some very difficult questions. Fortunately, part of their business model is to give away some of that research for free. (It helps attract clients.) So, we’ve consolidated some key research findings on the construction industry published by some of the brightest brains on this planet – MBAs.

According to a Deloitte report, the construction industry spends half as much on information technology, or IT, compared to the average across all industries. A June 2020 McKinsey report estimates that construction industry spending on software and infrastructure could double as the construction industry starts to catch up with the manufacturing industry. Today, Procore estimates that the construction industry spends approximately $12.4 billion worldwide annually on application software. It’s conceivable that the number could grow meaningfully in the years to come, so naturally, some big players want a piece of the pie.

The Competition

Creating a software platform for an industry to operate on seems novel, but not for industries that are operating way behind the times. The Procore S-1 filing lists various elements of competition, one being “aggregated construction management products,” including those offered by:

• Oracle (including through its acquisitions of Primavera Systems, Aconex, and Textura)
• Autodesk (including through its acquisitions of PlanGrid, Assemble Systems, BuildingConnected, and Pype)
• Trimble (including through its acquisitions of Viewpoint and e-Builder)

Note how this information is presented. Clearly, these are notable names in the construction management space that are being acquired by large, diversified software companies – a frantic land grab of sorts.

A common metric used among all these firms is “construction project value,” and it’s the total value of projects on the platform at any given time. Procore has about a trillion dollars in projects on their platform right now which brought in just over $400 million in revenues for 2020, a number that’s growing fast. But Procore isn’t the only company with impressive numbers.

In 2018, Trimble acquired e-Builder which – three years ago – managed $300 billion of construction project value, a number that’s likely to have grown. They also acquired Viewpoint several months later at which time it had $400 billion of construction project value. If Trimble grew those combined businesses by 10% a year, they’d already be closing in on a trillion dollars – the same construction project value that Procore has. Oracle dwarfs all of them, with $9 trillion dollars in construction project value. Procore appears to be facing some solid competition.

At the end of the day, we need to put down the reports and filing documents and make a decision about whether or not we want some action at this table.

To Buy or Not to Buy

Using software to connect a fragmented industry often creates continuously expanding opportunities, distributed manufacturing being a good example of that. It’s about the only way you’ll be able to see digital advancement accelerate at the rate it needs to transform an archaic industry into a modern one. We love that construction isn’t a very sexy industry, so the Robinhood types haven’t pumped up shares of Procore to a ridiculous level.

Procore’s Valuation

With an $11.35 billion market cap, Procore is worth more than twice what they were valued at in their last private round which closed just over a year ago. But we’re more interested in what they’re worth today, based on our simple valuation ratio – market cap / annualized revenues. We can use other enterprise software companies we’re familiar with as a benchmark.

	Market Cap	Annualized Revenues	Valuation Ratio
PALANTIR (PLTR)	39	1.364	29
C3 (AI)	5.8	0.196	30
SPLUNK (SPLK)	19	2.98	6.4
ALTERYX (AYX)	5	0.472	11
UIPATH (PATH)	41	0.607	67
UNITY (U)	26	0.94	28
DOCUSIGN (DOCU)	38	1.724	22
		Average	27
PROCORE (PCOR)	11	0.455	25

Procore’s valuation is around the basket average right now, so it’s hard to say it’s too overvalued to start a position. (On that note, we’re having our research team put some more rationale behind what our valuation cutoff number ought to be and why.) Even if the stock is fairly valued enough to start accumulating, we still have some concerns around how the business model might react to an economic downturn.

Construction in Recessions

For all practical purposes, the market has been on an absolute tear over the last decade. Many of our readers get extremely shaken when the market corrects a bit, and it’s probably because they’ve only known one direction for the past ten years – up. Here’s a simple chart of a popular ETF that tracks the Nasdaq- Invesco QQQ Trust (QQQ).

Over the last ten years, the flagship barometer for tech stock performance has returned over +460%. All you had to do was invest in a simple Nasdaq ETF like QQQ when Kung Fu Panda 2 came out, and you’d already have more than quadrupled your money. The red arrow you see on the above chart is how the market reacted to a pandemic that decimated the trillion-dollar travel industry, and is now sending the price of agricultural products through the roof.

If there’s a recession on the horizon, we don’t want pure-play exposure to construction, at least based on what history tells us. The 2007-2009 recession saw a -37.1% decrease in the total value of construction work performed across the U.S. (only 12% of Procore’s 2020 revenues were from outside the U.S.). Even the company points out how susceptible their business model is to economic downturns. In the company’s own words:

If the construction industry experiences a decrease in overall construction volume, the amount our customers pay for our products could be reduced as we generally price our products based on a customer’s annual construction volume, which is the fixed aggregate dollar volume of construction work contracted to run on our platform annually.

Credit: Procore S-1

This is the type of company you want to buy when there’s a recession, not when times are good. If we’re wrong and the economy continues on a tear for another decade, we’re happy to be making money on the 34 other tech stocks we’re already holding.

Conclusion

We love software-as-a–service (SaaS) businesses with big blue-ocean TAMs and even bigger margins awaiting them in the future. Procore promises that, but also operates in a competitive marketplace that’s subject to the fortunes of the construction industry as a whole. As risk-averse investors, we try to avoid stocks that will be heavily impacted by economic downturns. A less risky way to play the growth of construction tech might be with a diversified software company like Trimble, a topic for a future article no doubt.

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