A New High-Quality Stock for Your Watchlist

John Barrett: Last month, we initiated coverage of narrow-moat Coupa with a fair value estimate of $116 per share. We think the business is resonating with customers and has the opportunity to grow revenue 30% over the next few years. But with stock trading above $140 per share, or roughly 19 times 2019 revenue, we do not think that this is an attractive entry point for investors.

Coupa is a cloud-based procurement and expense management platform connecting over 1,000 customers with over 4 million suppliers. Coupa’s platform assists customers from the procurement of goods through to invoicing and reconciliation of purchase orders. Coupa’s platform helps customers save money and gain more control over their spending by pushing employees towards preferred vendors and managing supplier relationships. The company’s main competition is SAP and its combination of acquisitions Ariba and Concur. 

Coupa boasts strong user metrics with net retention rates over 110% and gross renewal rates near 95%. As a clear indication of the platform’s utility, Coupa's customers have more than doubled their average spend on the platform since 2016. Management has set a goal to grow revenue over 30% over the next four to six years, which we believe is attainable. We think revenue growth will continue to come from on-boarding new customers but that the company will also have an opportunity to increase pricing as well as cross-selling to existing customers. Lastly, we think that the recent introduction of its Coupa Pay module could provide an opportunity for Coupa to take a cut of transactions flowing through its platform, which would represent a large opportunity.

While we like Coupa and we think that it has carved out a narrow moat for itself, we think that it is modestly overvalued at these levels.