Procore: A Market Leader In Construction Software That Has Been Outperforming Peers

Summary

• Procore is the leading construction focused software vendor.
• Results last quarter were exceptionally strong but the company's guidance was very conservative.
• The company appears to have functional advantages when compared to other competitors in the space.
• The company has substantial opportunities to manage expenses and reach positive non-GAAP operating margins and free cash flow sooner than forecast.
• The company has an intriguing product road map with several initiatives that could move the growth needle significantly in the next several years.

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Procore: Lots of Buzzword compliance here, but a real company as well

Procore (NYSE:PCOR) is probably not an investment idea on the lips or in the minds of most investors. It is a fairly recent IPO, having gone public in May 2020 at $67/share. It has done better, at least in terms of share price performance than many other enterprise software companies that went public in 2020, but it has lately traded in line with other cloud software companies. It has achieved substantial growth since it went public, some of it inorganic. On the other hand, it is still a long way from achieving non-GAAP profitability and consensus estimates do not show any improvement in that metric in the current year and beyond despite management commentary suggesting margin improvements. .

Some stocks have made what might be considered an annual move in the last couple of days prior to the release of results of Amazon (AMZN), Google (GOOG) (GOOG) and Apple (AAPL), coupled with the Friday’s job report. Procore is not one of those companies-its shares were up less 5% last week although they have risen by about 20% since the start of the year. The shares certainly need a risk-on environment to succeed, but that is probably not the only thing that needs to work for the shares to succeed as an investment. This is NOT an article that explores the nuances of Chairman Powell’s press conference, or his discussion at the Economic Club or the commentary of Christine Lagarde either. And this is not an article that will discuss Friday’s employment report, although its details (construction employment +25,000 in January, seasonally adjusted) might suggest that the construction space is not falling off a cliff. I certainly hope for a “softish” landing but there is no real way to know if that result comes to pass. I have personally thought that the Fed had been ignoring incoming data about the state of the economy and inflation for some time now, but again, this article is based on the prospects of Procore in the current economic environment and consensus projections for the rest of 2023, rather some forecast about economic growth.

I am recommending that investors with a longer-term time horizon start to acquire a position in PCOR stock at current valuations. I think that estimates are quite modest and can be readily exceeded. I expect that the company will or has become more focused on reaching non-GAAP profitability and generating cash sooner than is expressed in the current consensus forecast.

There is certainly substantial opportunity to mitigate costs and focus a bit more on profitability. The company’s opex ratios are extremely elevated although last quarter on a sequential basis, the company’s non-GAAP opex expense ratios did make some progress. And construction industry space appears to be far less saturated in terms of its potential adoption software than the vast preponderance of other software spaces. It also appears that demand for construction software is less cyclically sensitive than is the case for some other better known companies in the IT space. Procore appears to be a market leader in the space, and it has a CEO who has spent most of his working career focused on this area. Further, the company has a record of expanding its product footprint and a product roadmap with some very interesting potential.

Procore uses stock based compensation Last quarter stock based compensation expense was about 24% of revenues. That is about average for a company at this growth level. Stock based comp has been declining over the course of the last few quarters as a percent of revenue. That said, Procore will continue to use SBC for the foreseeable future. I prefer to look at dilution to account for SBC expense rather the reported numbers. Dilution for Procore has been at an annualized rate of 3.5% this year and I have used that level in the valuation analysis that is presented later in this article. That said, those readers who are particularly focused on SBC will not be likely to consider these shares.

Procore is a software company focused on sales to the construction industry. And the construction industry is supposedly violently cyclical, although recent construction activity in the US hasn’t shown any dramatic macro headwinds. The actual record shows the industry to be far less cyclical than its reputation.

There are a lot of wounded stocks, just starting to sit up and take nourishment as the saying goes. What is interesting, specifically, about PCOR, at least for me, is that the company, when it last gave guidance, spoke about the strength of its business, and its continued pipeline conversion without the stretched sales so common amongst other vendors. The CFO specifically called out the cautious approach used to provide guidance and went further by saying that the company would achieve a beat compared to estimates if the demand pattern for Procore remained stable. At the least, the construction industry overall has remained stabled.

What is equally interesting is just how large a target opportunity construction software presents. According to a McKinsey & Co. study, construction is the least digitized industry sector-excluding agriculture and hunting. This shows up in some woeful statistics: 80% average budget overrun on an average non-residential construction project, 20 months of delay on an average non-residential project and a substantial CO2 footprint for the industry.

Construction could be a mobile first, data driven industry. It isn’t. It ought to be using digital solutions to handle regulatory and contractual complexities. It doesn’t. And it faces a significant labor shortage while being unable to lift productivity to any significant amount. Procore has solutions to deal with these issues in what seems to be a frictionless and efficient manner.

The company is scheduled to report its results on 2/16. There has certainly been no anticipation of any significant upside in the share price which has simply mirrored the performance of the broader market movement of high growth IT vendors. It has seen a couple of positive estimate revisions. Could this be a company where concerns about macro headwinds are overdone? I simply do not recommend stocks based on their possible over or under performance in a specific quarter. I certainly don't have any non-public information regarding the coming results and guidance for Procore, and in this environment it isn’t easy to gauge just how of any earnings or guidance upside or downside might be already baked in.

On a relative basis, and using consensus forecasts, Procore shares aren’t spectacularly cheap. My projection is that the EV/S is above 9X, while I have projected a free cash flow margin of about 5%. I will discuss the valuation in further detail later in the article. On the other hand, Procore appears to have a leading position in the space. And the space itself is more diversified and more resilient than I have previously anticipated. Procore’s exposure to residential is far more limited than I had thought. While my bias is long term, in evaluating stocks to recommend and to invest in at this moment, one factor I use in my targeting is the current state of business segment addressed by the vendor. Much of investing in the IT space is choosing the right sector in which to invest. The following is a quote from the CEO during the last conference call

But really across the board, the sentiment is, is that they're very optimistic about the midterm and the long term, and their backlogs remain very full.

So they have more work than they know what to do with. And so they're out there trying to get as many projects going as they can. One of the biggest problems is that they have a challenge finding labor, as you well know. So they're not really worried about the next job. They're actually worried about finding the person to build the jobs that they haven't signed up for

Another quote from the CEO reinforces this point.

And we have seen that there is just a broad secular demand for construction globally. And by the way, we always mention this, but even in the economic downturns, there's a lot of stimulus that comes into the market. Right now, we have the $1.2 trillion infrastructure bill in the U.S. amongst the chips bill too. So where one sector kind of wanes, the other one expands. But what we're seeing is that the pie is growing, and it's growing across all facets of construction. The other thing that is driving our success is the product market fit. We've been heavily focused on this for years, and our platform provides a tremendous amount of value to our customers, where they say they can run 48% more business per employee by running Procore.

It is a lot easier to maintain and accelerate revenue growth for a software company if the customers themselves are positive about their own businesses. I recently wrote an article recommending the shares of Bill.com. Bill is a strong company, with lots of competitive advantages and a huge opportunity set. But it exists in the economy, and last Friday, that realization is caused the shares to implode. I confess to a bit of bafflement as to why investors were not aware that SMBs would reduce the GPV in a constrained economic environment, but the fact is that business results follow macro trends, and while macro headwinds are fierce for Bill, somewhat surprisingly, at least to this writer, they have not impacted the demand environment for the construction industry, and apparently Procore. And that is basically why I believe the shares are attractive, and perhaps de risked to some extent as the guidance, apparently doesn’t really reflect the health of the businesses to which Procore sells.

Procore is founder led and has a very significant industry focus. Most of the senior team has been together for several years at this point

What is construction software and how does Procore fit into the space

Construction software is as elaborate as any other segment of the software space. The space, and Procore itself, have evolved substantially in recent years. Construction software includes several major pieces of functionality such as preconstruction, project execution, workforce management, financial management and analytics. Within each segment, vendors typically offer multiple modules. Many small software companies have developed point solution to deal with specific pain points. Procore has an app store with hundreds of point vendors and it offers 400+ integrations at this point. Examples of point solutions include software to ensure a project is handed over properly to an owner or building warranty management.

The company has expanded its scope by moving upmarket to the largest contractors, and also expanded its TAM by moving from an exclusive focus on general contractors to offerings for specialty contractors and for owners who serve as their own GC’s. GCs currently represent about 60% of revenue, 22% of revenue comes from owners and 14% of revenues come from what are called specialty contractors. The latter two customer groups are growing faster than the GC space.

Procore reported a net expansion rate of 116% as part of its analyst day presentation. The retention rate has risen noticeably since the end of 2021 when it was 109%; it has been as high as 121% before the introduction of the current contract type. The company does not always report that metric in its earnings release, although that is a significant component of the investment case.. That said, this is a land/expand software company. Lots of the growth is coming from users who have multiple products.

In Procore’s Investor Day presentation, the company presented a slide showing that it has the opportunity to expand its ARR by 50%+ simply by moving its existing base of users from their current deployment levels to 6 or more product solutions. At this point, about 50% of the company’s revenues are coming from its project management solution. Its fastest growing solutions are those of invoice management and analytics. Invoice management is actually experiencing an 80%+ growth in ARR. It is planning to introduce a payment module to go with its invoice solution later this year and the record it has enjoyed with the launch of the invoice management solution suggests that this can be a significant product launch.

The company has evolved substantially in the last several years. Its core products have been project management and project financials which are the solutions offered by all construction software companies. It has introduced modules for quality and safety, invoice management, Building Information Management (BIM), analytics, workforce planning, estimating and bid management. Some of the evolution of the product set has been through acquisition. Procore Pay, which is an application similar in concept to the core application of Bill.com is scheduled to be available this year.

I will come back to competition in a later section of this article. Basically, the company maintains that its success has been due to its complete construction focus, its mobile first experience and the agility of the app with coupled with its open platform. The ROI of the solution appears substantial with many quantitative proof points. Of course anything having to do with surveys instantly draws skepticism from this writer having seen so many of these claims, but I have to work with what is available.

Unlike some other software companies, Procore is not pivoting to the enterprise specifically. It already gets 55% of its ARR from enterprise users, with 30% coming from the mid-market and the balance coming from SMBs. That said, all of these sizes of users are growing equally. The construction industry is as fragmented in terms of customer targets as almost anything that exists in the software world. That said, Procore's largest users, i.e. those with ARR of more than $1 million, are growing the most rapidly. The company most recently reported that it had 41 of these large users; this should be a growing component of revenue given the numerous modules large users typically procure.

Procore’s Addressable market and its competitive position

Most market research firms evaluate the size of the construction management software market at around $6 billion with a CAGR of a bit less than 10%. Procore’s own estimates are quite a bit greater - $9.4 billion at the time the S-1 was prepared, and significantly more these days as the company has rolled out numerous additional solutions. The real issue, and the potential for Procore specifically, is that the construction industry, unlike many other business segments, is substantially underinvested in software in terms of its spend/revenue ratio. Statistics suggests that usage is half or less compared to the average at about 1.5% of revenues in the space. Penetration is low because of the fragmented nature of the industry-lots of construction is done by smaller entities and by project owners and those groups have been difficult to reach on a cost effective basis. It may also be low because software has been difficult to implement and use, and because of the multiplicity of non-integrated point products. Procore has a very elevated sales and marketing spend ratio, in part because of the expense of trying to reach all of the potential clients.

Unlike many spaces, Gartner doesn’t have a current Magic Quadrant focusing on Construction Software. I have linked to one recent study by a market research study from a firm called IT Click. This firm suggests that Procore has a more feature rich solution that is easier to deploy and learn than competitors. I have also linked to another survey from Business Software which really doesn’t draw any conclusions. The company has numerous well known customers such as Turner, HITT and Suffolk Construction. Of its competitors, the best known is Autodesk (ADSK) which offers its construction cloud. Procore apparently has a greater market share and is growing faster than the Autodesk construction cloud. I have linked to a Procore commercial comparing its offering suggesting that Procore’s solution is a bit more functional and benefits from its mobile first orientation.

Procore’s competitive position should achieve further enhancement going forward as the impact of some of its recent product offerings becomes more substantial. Basically, Procore has a far more extensive set of offerings than most of its smaller competitors, it is completely construction focused with a mobile first app and its platform approach is one that resonates with users in this space.

Procore’s Product Roadmap - Some interesting potentials

As noted above, Procore has been steadily expanding its product footprint. It has 3 major initiatives; one of which has been recently released, one of which is scheduled for availability later this year, and one to be offered soon thereafter. The company’s Materials Financing initiative may draw some skepticism from readers and from this writer given various expressed concerns about credit availability and potential underwriting issues. It is essentially a fintech application based on data driven underwriting, and that may sound eerily familiar. But this program is really nothing at all like Affirm (AFRM) and Upstart (UPST). It is much closer in concept to the capital programs of Shopify (SHOP) and Square (SQ) and shouldn’t have the credit risks or other issues that have plagued both Affirm and Upstart whose market is in the consumer lending space. It should be noted that at least one other construction software vendor also offers materials financing to its clients.

About a year ago, Procore acquired Levelset, a company that had been selling its software on the Procore App Marketplace for several years. Levelset has offered what is called lien rights management software, and in turn this helps contractors get paid by their clients and to pay their suppliers on a timelier basis. Because of the compliance issues, construction has the longest receivables and payables cycles of all major verticals according to industry surveys.

Levelset itself is not a huge revenue contributor; last quarter Levelset revenues were just 4.5% of the total. What Levelset is doing, however, is to provide an additional lever for overall platform growth. In addition, the Levelset technology is part of the software that is necessary for the company’s newly released material financing offering described below. In addition, the technology will be part of the Procore payments module that is to be released later this year.

Procore paid $500 million to acquire Levelset which was a significant revenue multiple. But the technology and the cross sell opportunities were the main factors justifying the merger.

Procore recently introduced a Materials Financing offering for its customers. As mentioned, the Lien Rights capability of the offering, a crucial component, was adopted from Levelset which was recently acquired. Procore deals with loads of cash-strapped contractors who have to lay out money for materials significantly before they get paid by their clients. Many of these contractors have limited credit history, and often have difficulty in obtaining a line of credit to finance the purchase of materials they need to complete jobs. This capital stringency, in turn limits the ability of these smaller/specialty contractors to bid on more jobs.

Procore obviously has an excellent view of the payment chain of projects in which potential clients wish to bid. And it has the expertise and software that allow it to secure necessary lien rights so that the financing it is extending is based on hard assets. So far the program is just in its nascent stages with $12 million of receivables financed. The average term is 120 days, the company receives an origination fee, and weekly interest payments. It is not yet material; the company has suggested that initially advances will be limited to 10% of its cash balance or about $55 million. At that level of financing, the program itself isn’t going to generate a substantial level of income for Procore nor will the company create any significant credit risk. Financing the purchase of materials for contractors is a far more complex process with numerous compliance subtleties. It has a significant potential but that potential will take time to realize; it probably will not move the needle significantly in 2023.

That said, what the materials financing offering can do for Procore, however, is to act as part of a flywheel in which contractors choose to use its software to become eligible for asset backed lending to which they would not have access on their own. In that fashion, the program can accelerate growth amongst the company’s specialty contractor market overall, even if initially it doesn't produce material revenues itself.

For the program to be meaningful, Procore will have to develop partnership relationships with several FIs. It has the ability to provide these FIs with technology and data to best underwrite and manage a materials management financing program on an outsourced basis. It certainly seems as though a Procore branded materials financing program to fund the acquisition of required supplies in the course of a large, complex construction project is a significant opportunity business opportunity. But it will not be impacting results in 2023.

The company is planning on launching a payments offering later in 2023. The offering will be double sided in that it is meant to both create invoices and to manage the requirements of releasing payments. It is somewhat similar to the offerings of Bill.com, although, purpose created for the construction industry, and thus significantly more complex than what Bill offers to its SMB clients. I believe that a payments module will be a significant growth driver for this company, although like most new offerings it can take some time before total company results are visibly impacted. Procore’s pricing has not been usage based thus far; it would seem to me, at least, that any successful payments offering would need to be priced with some charge per invoice processed and payment made. Procore has significant “flywheel” advantages in offering a payment service for its clients; there are sales and technology synergies of various kinds particularly because of the platform approach for an internally built solution. The company has suggested that much of its installed base has signaled their interest in the offering, and just judging by the massive success Bill has enjoyed with its payment solution, this is an itch that needs scratching in the construction space.

The company is also planning an offering that targets the management of insurance for its construction clients. This is a future opportunity that makes lots of sense, but has lots of complexities as well, probably makings its development course lengthy and expensive. Insurance is a substantial cost burden for contractors and Procore has proprietary data that can help in the underwriting process. Again, its platform approach should provide the company with a significant business opportunity within its installed base.

Of course handicapping the likely success and ramp of new offerings is a fraught undertaking. Just based on my own past work experience I think I can fairly say that no new product launch goes as expected. It isn’t surprising looking at the complexities that have been outlined just in the payment space that this has been a major undertaking. Without some knowledge of the pricing, even trying to guess potential revenues for this offering would be just that…a guess. But almost certainly this is a substantial opportunity that seems under evaluated in estimates for the company’s future growth prospects.

Recent financials and forecasts: Are the numbers here sufficiently de risked to account for continuing macro headwinds?

Procore is scheduled to report the results for its 4^th fiscal quarter, and fiscal year on 2/16. In the last month two analysts have raised their estimates while reiterating their ratings. One analyst, at Loop Capital, initiated coverage with a buy rating and a $70 price target at the end of last year. Procore hasn’t been a public company that long; since the shares went public the company has met once, missed once, and beat quite substantially the last time around. Specifically, the company had forecast revenues of $175 million with a non-GAAP operating margin of -13%. Actual results were revenues of $186 million with a non-GAAP operating margin of -7%. The company was able to reach positive operating cash flow last quarter. Going forward, I expect that the company’s free cash flow margin will wind up closely tracking non-GAAP operating income. At this point, the company’s foray into financing materials is not of a magnitude that is likely to upset that calculation.

Guidance for Q4 called for revenues of $190 million with non-GAAP margins of -10% and that is pretty much the current consensus forecast. I think it is relevant to present the CFO’s specific commentary on the forecast.

As Tooey noted, the broader environment remains highly dynamic. Regarding our revenue guidance, we have tried to take into account this uncertainty and factor in the potential for incremental weakness in the market that we have still not seen in our business today. Should our demand environment remain stable, we see room for upside to our guidance. We took a similar approach during our Q1 earnings call to set guidance at a level we felt was appropriate based on the same external dynamics.

I don’t make recommendations based on attempting to outguess the market with regards to specific quarters. While the enterprise software space in general has seen some evidence of demand slowdown in the latest months, that isn’t necessarily true across the board. For example, earlier this week, a Wells Fargo survey of resellers and integrators indicated that the observability space had seen strong sales performance through the end of January and the recently results of both Dynatrace (DT) and New Relic (NEWR) illustrate that not all of the software world has been a kill zone.

I wouldn’t specifically recommend subscribers/readers establish a position in shares of Procore because there seems to be a likelihood that quarter to be reported could be an upside. There has been nothing that indicates that construction spending has deteriorated markedly since this company provided guidance, but sometimes customers for software reflect sentiment rather than the state of their own business. That might have happened although I think the odds favor that Procore’s results will be above its de-risked guidance. Will the company’s guidance reflect the current malaise in the technology space, or reflect relatively stable trends in the construction industry? I simply do not know and do not wish to hazard a guess with a lack of information available.

Many readers, when they think of construction, think of a highly cyclical industry, in whole or part, animated by home construction. I know I have had a similar understanding of the cyclicality of the construction business. I actually might have thought that commercial construction of offices and shopping centers might have enhanced cyclicality. The company, in its investor presentation, presented a construction spend chart that suggests that construction spend in the US is less cyclical than I had expected. Part of that relates to construction spend on infrastructure which continues to benefit from the passage on the infrastructure spending bill a year ago. Some of the stability in construction spend is apparently is a function of mixed use development and multi-family housing which has proven to be less cyclical. Overall, construction spending in December was $1,810 billion at an annual rate, down marginally from November, and up almost 8% year on year. Spending growth is slowing but it isn’t deteriorating at alarming rates either. The most recent forecast I have seen regarding construction spending in 2023 coming from economists at Associated Builders and Contractors, Associated General Contractors and Dodge Analytics is projecting some, although not robust growth in contracting volume in the US based on strength in public works, power/utilities and data center construction offsetting weakness in residential, office, retail and warehouse construction.

As of November, contractor confidence remains surprisingly upbeat according to ABC’s Construction Confidence Index. “Six in 10 contractors intend to increase their staffing levels over the next six months, while just more than one in 10 expect to shed workers,” says Zack Fritz, Economist for ABC. “About half of contractors expect their sales to increase compared to about two in 10 who expect their sales to decrease.”

Again, I am not sure that the level of optimism amongst surveyed contractors correlates with construction software spend, but my guess is that at least suggests that the market for construction software has been stable and may remain more stable than anticipated in 2023.

The Procore business model: it needs attention

Procore reported a very strong quarter when it last released its earnings. But the signs of moderation in expense growth were just faint; the upside to earnings was a function of higher revenues. The vast preponderance of software companies have chosen to make expense management a priority. While the construction industry may see more stable demand, overall, than other economic segments, prudence would seem to dictate the need for more expense control going forward. In a case of looking at a glass half full, the very elevated levels of opex spending provide ample scope to target expenses without impacting the company’s growth. Of course I can make no claim to know whether, and by how much, the company will prioritize expense mitigation, but given the prudence with which management approached guidance last quarter in the wake of a significant business over attainment, I do expect that expense management will become a priority.

The company’s non-GAAP gross margins have been high and have trended a bit higher in recent quarters. The platform/multi-product paradigm that the company has developed helps support pricing and gross margin attainment, I believe. Last quarter, non-GAAP gross margins were 84% consistent with year earlier levels, and up slightly from the prior quarter.

The company’s non-GAAP sales and marketing expense ratio was 48% last quarter. The ratio actually rose from year earlier levels, partially due to the integration with Levelset. On a sequential basis, the ratio fell from 51% and sales and marketing dollars rose less than 3%, compared to an 8% sequential increase in revenue. ARR growth, probably a better metric to consider when considering the trend in sales and marketing spend, rose by more than 10% sequentially-this is a company where deals were closing sooner rather than later than anticipated. A sign, perhaps of some operating leverage.

The company’s research and development expense ratio was 27% last quarter, down slightly from the prior quarter and the prior year. Sequentially, research and development expense rose by 4%. The company has an ambitious product road map and it supports a multiplicity of solutions. While the expense ratio is higher than average for a company of this size, it may not be possible to see huge improvements while the company is rolling out significant new solutions such as payments.

Non-GAAP general and administrative expense was 19% of revenue last quarter, up from the year earlier period and quite a bit greater than average for a company of this size. On a sequential basis, non-GAAP general and administrative expense rose by 14%. The CFO didn’t comment specifically on reasons for the spike in G&A expense last quarter although it may have been a function of the issues of trying to ramp the company’s international business. The company alluded to issues in its international initiatives and it may be spending money to remediate some issues.

Overall, I felt that the company guidance for non-GAAP margins was not overly inspiring, with a step back forecast to a non –GAAP operating loss margin forecast to the 10%-11% range for the quarter to be reported next week. Obviously that figure will be dependent on revenue performance, but it still implies about 5% sequential growth in operating expense for the quarter to be reported.

As mentioned, free cash flow should track the trajectory of non-GAAP operating margins. Operating cash flow was positive last quarter based mainly on balance sheet factors which can be seasonal and random.

Procore has been managing the business to try to balance its growth opportunities with a steady improvement in non-GAAP operating margins. These days most investors are impatient to see improvements in margins. Given the relatively stable demand environment in which revenue growth is not significantly deteriorating, I believe the company can reach positive non-GAAP margins and free cash flow generation in 2023. Of course, at this point, 10 days before the earnings conference call that is a bit of guess and I no way of determining if the company will choose to articulate a pivot towards margin improvement during the coming conference call.

Wrapping Up-Procore’s valuation and the case to buy Procore shares

PCOR shares are not the cheapest investment alternative in the IT space. Based on my revenue projections the EV/S is about 9X and that is greater than average for the company’s 3 year CAGR projection of 28%. So, why am I rating it a buy. The company, when it last reported, provided very conservative growth estimates. But it also said that if market conditions remained stable, it would beat those estimates. At least in terms of published estimates, analysts reduced their growth expectations and have built in no margin improvement for their Procore expectations in the next year. This seems less than likely. In other words, at least at this juncture, it appears that Procore is less cyclically sensitive than feared and forecast, and can achieve positive non-GAAP operating income and free cash flow sooner than is currently anticipated.

The software industry tends to eat its own cooking as the saying goes, and when there are layoffs in the tech space as has been the case, that winds up affecting the growth trajectory of many enterprise software companies. That is not a factor with Procore.

A second point is that there is an enormous opportunity for the company to improve its margin trajectory substantially if the feared demand compression is less than has been forecast. This company has exceptionally high expense ratios that can be mitigated substantially with expense discipline. There were some signs of that last quarter, but the cadence can be accelerated. I think that is a reasonable possibility.

A third point is that this company is the leading competitor in a very under-penetrated vertical. Data suggests that the construction industry spend ratio on IT is half or less that of other industries. Part of that is probably that this has been and remains a very fragmented space in which prospective customers can be difficult to reach for a typical software go-to-market selling motion. Overall, the company has a strong competitive position; its software is said to be feature rich, easy to deploy and has garnered substantial user satisfaction.

A final point is the company’s product road map. In particular, I think introducing a payment module has the potential for significant success coupled with reinforcing the company’s flywheel.

Procore shares are not likely to appreciate in a risk-off market and this is not an article to handicap the commentary of Fed speakers, or the likely trajectory of incoming data. But I believe that Procore has the potential, or perhaps the likelihood of achieving differentiated performance during this extremely tough climate for the enterprise software space. On that basis, I believe it will generate significant positive alpha.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in PCOR over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.