Coupa Software Stock Rallies 2x This Year – Too Good To Be True?

After a staggering 172% rise since the March low of this year, at the current price of around $298 per share we believe Coupa Software stock (NASDAQ: COUP) has reached its near term potential. Coupa Software, an expense management software provider, has seen its stock rally from $110 to $298 off its recent bottom compared to the S&P which moved 43%. On the way down, Coupa stock had taken a beating of around 37% going from $173 to $110, a rate slightly higher than the S&P 500, which fell by about 34%. Further, the stock is also up a large  374% from its early 2019 levels, a year and a half ago.

Coupa stock has recovered much beyond its pre-crisis level of February before the coronavirus outbreak became a pandemic. This seems to make it fully valued as, in reality, demand and revenues will likely be lower this year than last year.

Coupa Software stock rose over the last year or so, due to a 109% jump in revenue, which despite an 18% rise in the outstanding share count, led to a 77% rise in the revenue per share (RPS). However, the company saw a drop in profitability, with earnings on a per share basis dropping from -$0.83 in 2018 to -$1.45 in 2020 (Coupa’s fiscal year ends in January). However, this was due to a jump in interest expense, whereas operating margins actually improved over this period. (-24% in 2018 to -19% in 2020).

While the company has seen revenue rise 109% over recent years, its Price-to-Sales multiple (P/S) rose from 17.8x in 2017 to 32.4x in 2019. However, this year the P/S multiple has jumped to 47.7x. Therefore, we believe there is significant potential downside when we consider the current scenario, and how it could impact the company’s business. Our interactive dashboard What Factors Drove 373% Change in Coupa Software Stock between 2018 and now? has the underlying numbers.

So what’s the likely trigger and timing for this downside?

The global spread of Coronavirus, and the resulting lockdowns and quarantine means that a lot of businesses are looking to cut costs and this could benefit Coupa Software as it makes software to analyze corporate expense data, in order to help cut unnecessary costs and optimize expenses. However, a lot of companies are also struggling and would look to avoid investing in such services, trying to optimize costs by themselves. The mixed impact this could have on the company is still not clear, and we believe Coupa Software’s Q2 ’21 results in August will paint a clearer picture.

Regardless, if there isn’t clear evidence of containment of the virus at the time of the earnings announcement, we believe the stock will see its P/S decline from the current level of 48x to around 40x, which combined with a slight reduction in revenues and margins could result in the stock price shrinking to as low as $240.

While Coupa Software stock doesn’t seem to have much near term upside, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

Our dashboard forecasting U.S. Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture.
The complete set of coronavirus impact and timing analyses is available here

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