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Morningstar | Procuring Locked-In Users, Narrow-Moat Coupa Primed for Growth; Initiating Coverage With $116 FVE

We are initiating coverage of Coupa Software with a fair value estimate of $116 per share, a narrow economic moat, positive moat trend rating, and shares appear fairly valued to us. Coupa Software is a cloud-based, business spend management platform that provides companies with more control and visibility into how they spend money. The platform consists of an end-to-end integrated application that assists from procurement of goods through to the sending and receiving of invoices. The platform helps customers get a better understanding of their spending habits and gain more control over them through expense management, budgeting, and inventory optimization. Through its marketplace, which connects nearly 1,000 customers with over 4 million suppliers, we believe that Coupa has carved out a moat and has ample opportunity to grow double-digits into the later portion of the next decade.

Coupa boasts strong customer user metrics with gross renewal rates of 95% and a net retention rate above 110%. While Coupa charges on a per-user subscription basis, we view average customer spend as a strong indicator of customer utility. Customers have pushed more spend onto Coupa’s platform over the last three years, with average customer spend hitting $468 million in 2019, up from $219 million in 2016. Coupa benefits from cross-selling that is driving revenue per customer higher. Average revenue per customer has risen 15% on average since 2016, up to $236,000 in 2019. Coupa will need to maintain these impressive customer metrics in order to attain management’s ambition for 4-6 more years of 30% annual growth. We project that management will be able to surpass its goal of $1 billion in revenue in 2024 as it maintains its impressive growth trajectory for the next five years. Revenue growth will mainly be driven by an increase in customers, rather than cross-selling to existing customers, as we model Coupa adding over 550 net new customers on average over the next five years.

Coupa is entering into a competitive area of enterprise software applications that has been traditionally dominated by large ERP providers SAP and Oracle. In particular, SAP, with acquisitions Ariba and Concur, stands as its most formidable competition. Ariba’s procurement network has over 3.8 million sellers with transaction volume surpassing $2 trillion annually, while Concur’s expense management tool has over 58 million users, far exceeding Coupa. Additionally, both incumbents have major supply chain offerings, tangential to procurement and expense management, which we believe will be a much more difficult area for Coupa to break into.