Coupa Software: Little Known Tech Stock on Verge of a Breakout

Coupa stock
Credit:iStock.com/monsitj

Coupa Software Growth Deserves Higher

The small-cap segment has not proven favorable for the risk-on trader so far this year following the market-leading 19.5% advance by the Russell 2000 in 2016. The index is struggling to hold at above neutral year-to-date, down 3.94% in August and threatening to halt the modest two-month winning streak.

Searching for sound small-caps with good risk-to-reward profiles remains tricky, but a small California-based company that could be a big winner down the road is Coupa Software Inc (NASDAQ:COUP) with a market-cap of $1.54 billion.

With COUP stock down from its record high of $41.61 on October 6, 2016, we could see a retracement of the decline along with a move much higher for patient investors. Coupa Software could easily deliver alpha adjusted returns to investors.

Coupa Software provides a cloud-based spend management platform that is used by management to monitor and more effectively manage spending by employees.

The company sells to markets in North America, Europe, and the Asia Pacific (Australia, India, and Singapore).

What makes me optimistic towards Coupa Software is the fact that all companies are always aiming to become more cost-effective with their budgets while not impacting growth. This provides the tailwinds for driving demand for this type of application.

Fundamentals Are Bullish for COUP Stock

Let’s take a look at the fundamentals and you will see why I favor COUP stock.

Revenues surged 61% to $133.77 million in FY17 (ended January 31) following an equally impressive 66% revenue boost to $83.67 million in FY16.

Gross margins for Coupa Software are strong at between 61% and 65% during the past three fiscal years.

Gross Margins

FY1564%
FY1661%
FY1766%

The revenue outlook looks great for Coupa Software, with projected growth of 30.3% to $174.26 million in FY18 followed by 24.8% to $217.56 million in FY19. (Source: “Coupa Software Incorporated (COUP),” Yahoo! Finance, last accessed August 17, 2017.)

Although the growth rate is narrowing, it should not be a surprise; the size of the revenue base is getting bigger so to expect lower growth rates is standard.

Coupa Software has yet to turn a GAAP or adjusted earnings, but the losses are declining and it is moving towards possible profits in FY20.

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And while Coupa Software continues to burn through cash, the company’s balance sheet is sound, with good working capital, no debt, and $238.12 million or $4.49 per share in cash. (Source: “Coupa Software Incorporated (COUP),” Yahoo! Finance, last accessed August 17, 2017.)

This strong cash gives COUP stock time to get things right without the need to rush things, which could hurt the business.

coup stock chart

Chart courtesy of StockCharts.com

Analyst Take:

The technical picture supports the bullish fundamentals. COUP stock is trading at a sideways channel at between $29.00 and $32.00. A sustained breakout at the 50-day moving average of $30.43 could see a move towards the 13-week high of $32.96 and $34.70. Coupa Software stock could regain $40.00 if it delivers on its expectations. Support is found at the 200-day moving average of $28.17.