Why Coupa Software (COUP) is a good bet for long-term investors

Coupa Software (NASDAQ: COUP), which is specialized in spend-optimization software, witnessed strong demand in recent months, with customers seeking to stay resilient to the pandemic and maintain profitability by effectively managing their costs. As a result, the company’s finances remained largely unaffected, though the management expected the business to face COVID-related headwinds in the early part of the year.

Stock Peaks

The San Mateo, California-based tech firm has reported stronger-than-expected earnings consistently in recent quarters. After staying on an upward trajectory for a long time, Coupa’s shares climbed to a record-high this month. Currently trading slightly above the $350-mark, it looks overvalued in relation to earnings. While the stock is still a good investment option from a long-term perspective, prospective buyers should be taking the risks into consideration.

Continuing its growth initiatives, Coupa last month acquired Llamasoft, an AI-powered supply chain design and planning company. Customer addition gathered pace in recent months, especially after the shelter-in-place orders came into place, with federal clients like the House of Representatives joining the community. Going forward, more federal agencies are expected to start using Coupa’s product, which currently meets the latest stage of federal government standards for cloud-based solutions.

Cloud Power

The solid adoption of the company’s cloud-native platform and customer retention shows there is a great opportunity to add more products to the core platform. That should drive revenue growth going forward and boost the bottom-line that has languished in the negative territory on a reported basis, raising concerns that the company’s fundamentals are not strong enough.

From Coupa’s third-quarter earnings conference call:

“Our customers see incredible value in what we’re offering, they’re paying us more and more on an annual subscription basis. The customers that we have are renewing and looking to add on more business without us actually pushing sales in their way, they’re actually absorbing a lot of our additional offerings. There’s a great deal of value in thinking about supply chains at this moment, and thinking about optimized ways to run your business when we get back to a new normal.”

The company recently expanded its partnership with American Express (AXP) for launching virtual cards, in a move that also marked the expansion of the Coupa Pay partner ecosystem that supports virtual card payments in the U.S. The system helps customers make digital payments in a convenient manner at a time when the market is witnessing a mass shift to digital platforms for financial transactions.

Record Revenue

In the third quarter, double-digit growth in subscription revenue drove up the top-line to a record high of $133 million, up 31% from the year-ago period. Meanwhile, earnings dropped to $0.18 per share from $0.20 per share last year but exceeded analysts’ forecast. So far, the performance in the current quarter is estimated to be on par with the last quarter, benefiting from a pipeline that is stronger compared to last year. Meanwhile, the Llamasoft acquisition is expected to weigh on margins in the coming quarters.

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Read management/analysts’ comments on Coupa’s Q3 earnings

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Coupa’s market value more than doubled since the onset of the COVID crisis and the uptrend is continuing. The stock got a fresh boost after the recent earnings release and continued to outperform the market. It closed the last trading session lower.