Reversal in play for Procore Technologies

Key Points

• Procore Technologies had another solid quarter marked by margin expansion. 
• Guidance is good and includes sequential margin improvement throughout the year. 
• Analysts are raising their price targets and leading this construction stock higher. 

Procore Technologies Inc. NYSE: PCOR is a construction management software platform serving civil, commercial and residential markets. It helps manage workflows, costs and communication between owners, project managers and contractors from conception to completion. In 2018, the construction company got its IPO and has grown at a high-but-slowing double-digit pace. 

Procore has a solid quarter; shares rise 5% 

Procore's topline growth is slowing, but so what? 

At 29%, it is still robust, and margins are widening, which is more important. Regardless, the $260 million in net revenue outpaced the consensus by nearly 500 basis points, compounded by strength on the bottom line and solid guidance for 2024. 

Revenue strength is driven by growth in large clients and penetration of services that also aid margin expansion. Customers contributing more than $100,000 in annual recurring revenue grew by 27%, while those contributing more than $1 million grew by 32%, affirming the platform's utility for project managers. 

The margin news is the most favorable in this report. The company continues to post GAAP losses, but the losses are narrowing, and adjusted margin improvement is accelerating into the new fiscal year. The gross margin improved by 200 bps GAAP and 100 adjusted, while the GAAP operating loss was more than halved. 

The adjusted operating margin expanded by 1,500 bps, from -8% to 7%. The critical detail is that operating and free cash flow are positive and more than doubled in 2023. 

The guidance is also favorable and builds on the margin improvement. The company expects revenue growth to slow to the low 20% range by year-end but for the margin to expand sequentially throughout the year. 

Adjusted operating margin is forecasted to expand by about 50 bps per quarter to drive consensus-beating results and outperformance relative to other construction stocks. 

Analysts on board with Procore; revisions drive the market higher

Procore has a substantial number of analysts tracking it, and they have it pegged at a firm "moderate buy." The consensus of 14 price targets is that Procore is fairly valued near recent price action, but the target has upward momentum. The consensus target is up more than 1,000 basis points in the last 12 months and rising after the 2024 guidance. 

The first analyst revision is from Piper Sandler, reiterating its "outperform" rating while raising the target to $80. The $80 target is a two-year high if reached; a move to the high target of $85 will put the market above critical resistance. 

Institutional activity is providing a tailwind for the market. The institutions and insiders own virtually all of this stock, and institutions have been buying it on balance for the last several quarters. Their activity spiked in the first half of Q1 2024. 

The technical outlook: Procore in reversal 

The Procore market struggled for years but is now in a reversal. The reversal is marked by a bottom in 2022, higher support in 2023, and a rally to new closing highs in 2024. 

Critical resistance is near $75. If the market can get above that, it could advance 30% to 35% to retest resistance at the all-time high by mid-year. The risk is overhand. With so much invested by institutions, insiders and shares are still down significantly from their high, and resistance at $75 could be solid. The market is struggling now; consolidation or correction will follow if it can't move higher.