Procore’s Levelset purchase a “Trojan horse” in battle for market dominance
Company is widening moat around business, looking to expand in other construction management categories, analysts said.
Procore, the maker of construction management software that went public this year, may pull away from rivals after making its biggest acquisition yet.
The California company put up $500 million in September to buy Levelset, a lien payments platform. The deal widens an economic moat around the company and opens prospects for future business in other areas of construction management, analysts said.
Levelset may prove to be a “Trojan horse” that allows Procore to corner business from specialty contractors, the biggest users of software to manage construction, and one that no one has so far cracked, said Brian Schwartz, an analyst at Oppenheimer & Co. Contractors often wait more than three months to be paid because of complex lien structures and inefficient manual workflows.
“This could open up a whole new monetization opportunity among the largest users,” said Schwartz, who has a “buy” rating on the company.
Procore, founded in 2002, slogged through years of slow sales before reaching a $1 billion “unicorn” valuation in 2016. Then, just when its IPO seemed imminent, the pandemic hit, shutting down the construction industry along with the rest of the economy.
The tenor had changed by the spring of 2021, when stalled construction projects began coming back online. The construction industry will probably record a compound annual growth rate of 4.7% between 2021 and 2025, according to ResearchAndMarkets.com.
Procore’s shares ultimately priced above the expected range and rose more than 30 percent on the first trading day.
The company has invested in platform flexibility that allows users to customize many tools and workflows on a single interface — an offering that differentiates the company from its competitors, according to Wyatt Jenkins, Procore’s senior vice president of product.
“Because of Procore’s flexibility, we’re having an easier and easier time extending our platform to different stakeholders, and expanding our platform to different countries,” Jenkins said in an interview.
In the coming quarters Procore aims to diversify revenues to sources outside North America, which now account for 15 percent of the total, and expand its user base to property owners, subcontractors and materials suppliers from general contractors, he said.
Procore’s trajectory has diverged from that of Textura, a competitor in construction contracts and payment management cloud services, which struggled to scale after going public in 2014 and has languished since it was bought by Oracle in 2016, Schwartz said.
“We’ve been hearing that the innovation and the capabilities of Textura — they’ve just dwindling away inside Oracle,” he said.
The price that Procore paid for Levelset was “reasonable” in view of synergies between the two companies and the additional functionality the company is likely to add to the platform, said Bhuvan Suri, an analyst at William Blair who rates the shares at “outperform.”
The company’s core platform can support “sustainable” revenue growth for the next several years, and the arrival of a potentially large set of new clients signals additional growth avenues, the analyst said.
“This acquisition helps plant the seeds for future opportunities around areas like contractor insurance, payment facilitation, and contractor financing by leveraging data aggregated across the more than 1.6 million users on the platform today,” Suri said.
Procore said this week that it will add a new reports builder, allowing users to compare data from both active and inactive projects, as well as a new global workflow engine, facilitating custom approval workflows. The new services will bring “cross-platform insights” that will improve efficiency in estimating and bidding processes, the company said.
Procore’s stock is up about 4.5% since its IPO, while the S&P 500 rose almost 6%. The Levelset acquisition is expected to close in the fourth quarter.