2 Reasons PCOR is risky and 1 stock to buy instead

In the last half year, Procore Technologies has performed well, outpacing the S&P 500 by 7.5%. The company's stock has risen to $62.26, marking a robust 16.6% increase. This growth can be attributed to its impressive quarterly earnings, prompting investors to consider their options regarding the stock.

However, despite the positive momentum, we advise caution regarding Procore Technologies. Here are two reasons to be wary of investing in PCOR, along with a recommendation for a more appealing alternative.

First, the anticipated revenue growth for Procore Technologies appears limited. Analysts on Wall Street often assess a company's potential based on its projected revenues. While forecasts can be inaccurate, a trend of increasing growth usually leads to higher stock valuations, whereas a slowdown can have the opposite effect. Over the next year, analysts predict that Procore's revenue will grow by just 13.4%, a significant decrease from the 26% annual growth rate the company has seen over the past five years. This forecast raises concerns about potential challenges in demand for its products and services.

Second, the company's ongoing operating losses are a cause for concern. Many software companies highlight adjusted profits that exclude stock-based compensation (SBC), but we believe it is important to consider GAAP operating margins, as SBC is a genuine expense necessary for attracting and retaining talent. This metric provides insight into how much revenue is left after accounting for all essential costs, including goods sold, sales, and research and development.

While Procore Technologies did report profitability for the most recent quarter from an operational standpoint, it has generally struggled over a longer timeframe. Its high cost structure has resulted in an average operating margin of negative 4.9% over the past year. Companies in the software sector that are unprofitable yet growing rapidly require careful scrutiny, as they often spend heavily to gain market share. Procore's history of rapid revenue growth suggests this strategy has been effective thus far, but it raises questions about what might happen if the company were to cut back on its investments. Analysts on Wall Street appear to be wary of potential challenges, and we share that sentiment.

In conclusion, while Procore Technologies is not a poor business, it does not meet our investment criteria. The stock has outperformed the market recently and is currently priced at a forward price-to-sales ratio of 5.8, or $62.26 per share. Although this valuation may seem reasonable, we do not perceive a significant investment opportunity at this time. We believe there are more attractive options available in the market, and we encourage investors to consider one of our top software stock recommendations instead.