A Software Company’s Shares Are Off 80%, but it’s Still Not an Investment

Companies frequently report better-than-expected sales and earnings. yet see their shares fall in the aftermath.

A case in point is Coupa Software  (COUP) – Get Coupa Software, Inc. Report, which Real Money Columnist Stephen “Sarge” Guilfoyle recently reviewed. 

The company reported adjusted EPS of $0.19 and generated revenue of $193.3 million during its latest quarter, which beat Wall Street estimates, resulting in year over year growth of 18.2%.

While these numbers were a good reflection of the quarter, they demonstrated decelerating growth, since quarterly subscription revenue increased by 28%, revenue growth and calculated billings grew much lower at 8%. Quarterly operating cash flow totaled $64.2 million and generated adjusted free cash flow of $60.6 million.

For the current quarter, the company estimates total revenue of $189 million to $191 million with subscription revenue of $171 million to $173 million, generating adjusted EPS of $0.03 to $0.06. Wall Street had projected adjusted earnings of $0.05 on revenue of over $196 million.

“Sometimes, it’s all about the guidance,” Guilfoyle wrote. “Heck, most times it’s all about the guidance.”

The immediate post-earnings selloff in the stock came  because the guidance was meaningfully below consensus estimates across the board, Guilfoyle  wrote.

Coupa predicts total 2022 revenue of $836 million to $840 million based on subscription revenue of $756 million to $760 million and generating adjusted EPS of $0.15 to $0.19. The problem is that the consensus view for adjusted earnings was $0.74 on revenue of about $878 million.

One major issue is the company’s goodwill, Guilfoyle wrote. Goodwill includes intangible assets such as brand name, customer loyalty, and other non-physical assets. It can be hard to give a dollar amount for such items.  Coupa Software has estimated these intangibles make up 47.4% of the company’s entire assets.

Another issue is that Coupa Software also includes another entry on the balance sheet that is worth $510.6 million in “intangible assets,” but is not deemed as goodwill.

The combination of both items total a whopping $2.03 billion, which accounts for 63.4% of the $3.19 billion in total assets. “Obviously, even with a very healthy current ratio, this balance sheet will not pass the Sarge test,” Guilfoyle wrote.

In the end, with Coupa shares down 80% over 13 months, Guilfoyle sees Coupa as a trading vehicle. “Go ahead. I have no problem trading anything with a range.” However, as an investment,  “in a chart like that? In a balance sheet I don’t like? No thank you.