We recently compiled a list of the 12 Best Small Cap Tech Stocks to Buy. In this article, we are going to take a look at where Procore Technologies Inc. (NYSE:PCOR) stands against the best small-cap tech stocks to buy.
US Inflation and the Anticipated Fed Cuts
Inflation in the US may have reached a 3-year low of 2.6% in August, the lowest rate since March 2021, according to a survey of economists by FactSet. Core inflation, excluding food and energy prices, is believed to have remained at 3.2%.
Inflation peaked at a 4-decade high of 9.1% in June 2022 as the economy rebounded rapidly from the pandemic recession. The Fed responded with 11 rate hikes in 2022 and 2023, raising its key rate to a 23-year high and significantly increasing borrowing costs across the economy. The easing of inflation may pave the way for the Fed to start cutting interest rates next week.
AP News reported that Fed officials think that inflation is steadily declining towards their 2% target. Reducing the Fed’s benchmark rate is expected to lower borrowing costs for consumers and businesses. Christopher Waller, a key Fed policymaker, noted that over half of tracked goods and services have seen annual inflation drop below 2.5%.
Craig Johnson, Chief Market Technician at Piper Sandler & Co., and Gene Goldman, Cetera’s CIO, recently came together to discuss the Fed’s interest rate cuts, and stock sector performance.
Gene Goldman expressed that his base case anticipates 3 rate cuts of 25 basis points each, beginning in September. His belief lies in the slowing inflation, a deceleration in economic growth, and the overall resilience of the economy, which he thinks is not as dire as some reports suggest. Goldman noted that while the labor market showed mixed signals, with both positive and negative data, the market’s expectations for deeper rate cuts may be exaggerated. Goldman acknowledged that political uncertainties could also contribute to market fluctuations.
Craig Johnson was also of the opinion that a 25 basis point cut is already anticipated by the market, suggesting that a 50 basis point cut could raise concerns among investors. He believes that a series of 25 basis point cuts would align with their perspective. Craig emphasized the importance of staying calm considering that, historically, October has been a strong month for the markets, with gains observed 86% of the time since 1929.
Johnson acknowledged that while there has been a recent pullback, particularly following the worst week for the markets since March 2023, there has been a rebound with the Nasdaq and S&P showing positive movements. He highlighted the necessity of dissecting the performance of the MAG 7 tech stocks, which he believes are now lagging. Instead, he pointed out that there are promising stocks within the $2 to $10 billion range that demonstrate solid growth potential, both at the top and bottom lines, and appear constructive on the charts.
He noted the Nasdaq’s 0.75% rebound but referred to it as a dead cat bounce, indicating that a more substantial recovery of 8-10% could be on the horizon. He attributed the day’s positive market sentiment to an employment report that exceeded expectations.
Methodology
We used stock screeners to look for companies trading between $1 billion and $10 billion, that’s our definition of small-cap stocks. We sorted our screen by market cap and looked through the top 25 stocks that matched our criteria. We then selected 12 stocks that were the most popular among elite hedge funds and that analysts were bullish on. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them, as of Q2 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Procore Technologies Inc. (NYSE:PCOR)
Market Capitalization as of September 11: $7.86 billion
Number of Hedge Fund Holders: 47
Procore Technologies Inc. (NYSE:PCOR) is an American construction management software as a service company that provides construction management software. It offers a cloud-based platform that helps construction professionals streamline their operations, improve collaboration, and manage projects more efficiently, providing a central hub for construction teams.
Total revenue in Q2 was $284.35 million, up 24.42% year-over-year, and international revenue grew 31% year-over-year. The company earned $4 million more than it expected for this quarter due to successful project implementations. Without this additional revenue, the growth would have been 22.8%. However, management says they don’t expect to earn this much from project implementations in the second half of 2024.
Number of customers contributing ~$100,000 in annual recurring revenue grew 20% year-over-year to 2,191. Overall, Procore Technologies Inc. (NYSE:PCOR) added 152 net new organic customers this quarter, ending with a total of 16,750 organic customers.
The company is actively working to sell to government agencies and expand its partnerships. It’s also making changes to its sales and marketing teams. Such expansions improve investor sentiments. It is currently held by 47 hedge funds. The largest stakeholder is XN Exponent Advisors with a position of $186,215,124.
Significant innovations to the Procore platform, including enhancements to Maps and Locations and a new Microsoft Teams integration, were announced on June 12. Procore Technologies launched the FedRAMP authorization process on July 16. The company was recognized by US News as one of the Best Companies to Work For on August 1.
The company’s full-year revenue guidance is over $1 billion. Procore Technologies Inc.’s (NYSE:PCOR) new model is designed to strengthen customer relationships, improve product adoption, and enhance overall efficiency. This strategic shift will position the company for continued growth and leadership in the construction industry.
Baron Discovery Fund stated the following regarding Procore Technologies, Inc. (NYSE:PCOR) in its Q2 2024 investor letter:
“We initiated an investment in Procore Technologies, Inc. (NYSE:PCOR) during the quarter. Founded in 2002, Procore provides cloud-based construction management software that helps general contractors, subcontractors, and asset owners manage every step of the construction process. Procore’s product suite includes project execution (storing and updating blueprints, designs, work orders and project schedules in a single system of record), pre-construction (managing bids, permitting, and approvals), workforce management (scheduling worker hours and recording safety compliance), financial management (budgeting and invoicing), and data analytics. Together these products help contractors execute projects more efficiently, plan more accurately, avoid costly rework, improve worker safety, and generate better margins. This has led to exceptionally low customer churn.
Procore serves a large and growing addressable market – annual construction volume exceeds $2 trillion in the U.S. alone – that is still in the early innings of digitization and technology adoption. The company has a leading market share in the sector, with more than 16,500 construction firms and asset owners using its software to manage billions of dollars of annual project volume. Yet Procore is still only 12% penetrated in terms of U.S. construction volume and 2% penetrated internationally. We believe the company has several competitive advantages that will drive further share capture and strong growth. First, Procore is the only cloud-native technology vendor that addresses all stages of the project life cycle with a single, integrated interface and data model. Second, Procore was the first vendor to price its platform using a “take-rate” model, charging a percentage fee against its customers’ total construction volume. Compared to seat-based license models offered by many competitors, this approach has encouraged far more industry practitioners to trial and use Procore products. As of last year, over 500,000 collaborator companies were interacting with its product, driving a strong pipeline for new customer wins.
We see a long runway for growth through new customer additions and expansion in existing accounts. The company has maintained low to mid-double-digit revenue expansion rates for existing customers by managing more project volume and by cross-selling additional product modules. Recent product innovations like Procore Pay (managing payments for the various vendors and subcontractors on a given project) and geospatial mapping (for larger civil engineering projects) should improve the company’s wallet share over time. Procore is cash flow positive today and has been increasing its margins meaningfully over the past two years. We think the business can continue to grow at a healthy rate while further expanding free cash flow margins to north of 20% as it benefits from market share capture, higher take rates, and operating leverage. This should lead to good earnings growth and bode well for the stock long term.”
Overall PCOR ranks 6th on our list of the best small-cap tech stocks to buy. While we acknowledge the potential of PCOR as an investment, our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than the stocks on our list but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.