BSM specialist Coupa’s (NASDAQ:COUP) share price, currently at around $69.5 has been on a painful downtrend as shown in the blue chart below despite delivering an 18.2% year-on-year growth during its fourth-quarter 2022 results which ended in January. Reasons vary from weak revenue and earnings guidance exacerbated by its loss-making status (GAAP figures), which are not helping in a stock market where the value strategy prevails.
Some analysts have downgraded the stock, due to the BSM (Business Spend Management) market maturing and competition getting stronger. Others think that the company will be acquired, most probably due to its share price falling by more than 80% ((69.5-369.5)/369.5) since its February 2021 high of $369.5.
Thus, my objective with this thesis is to identify potential suitors by shedding light on Coupa’s attractiveness as a potential acquisition target based on product strength.
Attractiveness amid Competition
BSM is all about helping businesses to manage the amount of money they spend on everything from sourcing and invoicing to treasury management. Strength in BSM is one of the reasons that Coupa was so successful during the first wave of the pandemic in 2020, as evidenced by the steep rise in the orange revenue chart above.
Another of its strengths is the ability to have directly packaged products to be cloud-based, instead of having to convert them from traditional client-server architecture in order to be accessible from the internet as rivals had to do.
Thinking aloud, by helping enterprises manage their expense using its unified cloud platform, Coupa goes at the heart of supply chain design and planning itself thereby making it particularly well suited for current corporate needs like maximizing every dollar of spending due to higher inflationary pressures. Also, Gartner is also forecasting that the supply chain management software industry will accelerate in 2022.
Despite favorable market conditions and technological strength, Coupa’s subscription growth has decelerated from a five-year average of 40% to a two-year average of 35%, with 20% expected for the current fiscal year ending January 2023. According to the executives, this could be due to delays in converting license contracts which typically cover one year to the SaaS revenue model. Another reason could be that after an exceptional 2020, and subsequent slowdown at the beginning of 2021, sales momentum is picking up but taking time to reach the previous record rate.
For this purpose, Coupa is competitively strong with a leadership position in Procure-to-Pay or P2P suites right in front of SAP SE (SAP) as shown below.
Now, these illustrations date back to 2021, and more recently, the company made it into the 2022 Gartner Magic Quadrant for supply chain planning solutions. Additionally, Coupa distinguishes itself from traditional ERP (Enterprise Resource Planning) or procurement management software providers through its extensive 190+ strong supplier ecosystem which allows its subscribers to have rapid access to a whole range of products, and at good prices.
Profitability and the Acquisition Rationale
However, as seen in the diagrams above, there are several other competitors too, as this is an area where the barrier to entry remains low. Moreover, two of its largest competitors are SAP and Oracle (ORCL) which, as matured ERP software providers have emulated Coupa either in adding P2P to their suites or laying more emphasis on that functionality. Consequently, Coupa has to spend heavily on SG&A which includes sales and marketing expenses to drive the adoption of its technology.
Tellingly, SG&A as a percentage of revenues rose from 59.2% in the fiscal year 2020 to 67.4% in 2022, resulting in further deterioration of the GAAP operating income margin as shown below.
Going ahead, operating costs are not likely to come down as wage inflation further eats into corporate profitability as the labor market for IT skills grows tighter. Also, with a cash balance of $729.5 million including short-term investments as of the end of January 2022 and annual operating expenses of $655 million, it may prove difficult for Coupa to fund acquisitions needed to accelerate growth. Now, with the interest rate rising and the Fed carrying out quantitative tightening whereby there is less liquidity in the market, the focus will be more on servicing the $1.66 billion of debt.
Thus, it would make great sense for the company to pursue its growth story as part of a bigger entity having a large amount of cash. Taking a glance at recent M&A activities, there could be a strategic deal whereby Coupa gets acquired by a major IT play or is bought by private equity. I favor the first option due to Coupa’s product strength and a relatively smaller market cap of about $5.5 billion.
Another noteworthy point is the cloud-native way in which its platform has been structured, which will necessitate relatively fewer integration works in case it is acquired by an IT company.
Identifying Potential Suitors
For this purpose, Coupa has a unified suite of applications, meaning that a potential acquirer does not have to spend a lot to make its different modules like procurement or treasury work together. Moreover, similarly to Salesforce (CRM) and Workday (NASDAQ:WDAY) for their CRM (customer relationships management) and HCM (human capital management) respectively, Coupa also proposes an extension to corporations’ ERP systems through the cloud. These are depicted in the picture below.
In addition to Salesforce and Workday, the above diagram also shows some key stakeholders in the ERP space like Oracle, SAP, and Microsoft (MSFT).
Looking at potential acquirers, Workday which has also expanded its HCM to a full-blown ERP could be interested in a deal to acquire and integrate with Coupa to expand its customer base. The company is equipped with cash and its debt is on the low side as shown in the table below. As for Salesforce, it has even better financial capability, while, Oracle which is in the process of acquiring Cerner (CERN) for $28 billion, should probably not be interested at this juncture.
Looking further, Coupa’s readily available APIs enable quick integration with all the major ERP providers including Microsoft’s Dynamics. Assessing for an acquisition interest by the software giant, the fact that the Coupa is hosted (resides) in Amazon’s AWS cloud implies that in case it is acquired by Microsoft, the latter’s engineers will have to perform additional work migrating it to the Azure cloud. This may be a factor that could deter Microsoft to make a bid.
On the other hand, the fact that both Workday and Salesforce (to a lesser measure) rely on AWS for their primary computing infrastructure would mean fewer migration efforts for these two companies in the event they acquire the BSM play.
Valuations and Key Takeaways
This said, there could be takeover interests by private equity as I elaborated upon in a recent thesis, and, in this respect, Thoma Bravo offered a 31.6% premium to the pre-deal closing stock price for SailPoint Technologies (SAIL). Furthermore, Concentrix (CNXC), a customer experience firm made a bid for ServiceSource (SREV) at a 47% premium. More recently, Broadcom’s bid for VMware (VMW) represented a 46% premium. Consequently, adjusting Coupa’s current share price of $72.6 by 46%, I obtain a target of around $101.5.
This is much higher than the $64 target which some analysts expect, probably due to the company still being overvalued with respect to the IT sector. However, this target does not consider the acquisition option.
Consequently, in case the BSM play makes public an intent to be acquired or is subject to a takeover bid, the share price could easily jump. For this matter, unlike the VMWare deal which may encounter regulatory issues like antitrust, this should not be the case of a software company acquiring Coupa as regulators are less stringent for enterprise applications.
Finally, the company remains a rapidly growing one whose BSM is highly relevant to the cost savings rationale by corporations large and small, but, competition remains strong. Also in a market guided by the value strategy whereby non-profitable companies (using the GAAP metrics) are being punished by investors, Coupa could experience more profitable growth if operating as part of a larger entity like Workday or Salesforce. I have thrown some names based on the platform integration criteria, but there are many others who could be interested including private equity. This said I have a hold rating till the company is subject to acquisition interest.
Read More: Coupa: Potential Acquisition Target, High Growth And Stock Downside (NASDAQ:COUP)