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On Tuesday, Craig-Hallum issued a downgrade for PROS Holdings (NYSE:PRO) stock, moving its from Buy to Hold and reducing the price target to $32 from the previous $40. The firm's analyst cited several challenges faced by the company, including macroeconomic headwinds and a cautious customer base, which have impacted the trajectory of revenue and billings.
PROS Holdings, which experienced an in-line first quarter in 2024 after adjustments for modest revenue pull forward, has provided a guide that aligns with expectations for the rest of the year.
However, the company's pivot to a land-and-expand strategy has resulted in a higher count of deals but with lower average selling prices (ASPs). The anticipated revenue increases from subsequent up-sells have not yet materialized to alter revenue and billings trends significantly.
The company's leading indicators, such as billings and remaining performance obligations (RPO), suggest that PROS Holdings continues to face difficulties in its end markets. The new go-to-market (GTM) leadership is implementing substantial changes, which may contribute to top-line growth over time. However, these changes also carry some risk in the near to intermediate term.
Investors are particularly focused on the company's target model for 2026, which was introduced in 2023. This model requires a significant shift from the company's current performance to achieve a Rule of 40 status by 2026, including an 18.5% year-over-year top-line growth and a 21% free cash flow (FCF) margin.
Craig-Hallum expressed skepticism about the company's ability to reach these targets without observable indicators of top-line growth, suggesting that aggressive cost containment may be necessary.
The analyst concluded that while PROS Holdings boasts a strong team and products, these are currently overshadowed by the tough macroeconomic environment and long-term operational challenges.
Additionally, the company's potential for market expansion and repeat business is somewhat limited in markets with less comprehensive data sets for elasticity analysis. As a result, the firm has assumed coverage with a Hold rating and a price target based on 51x enterprise value to 2025 estimated EBITDA and 76x 2025 estimated earnings.
In other recent news, PROS Holdings has reported a strong financial performance during the first quarter of 2024, surpassing its guidance with substantial growth in subscription revenue, total revenue, and adjusted EBITDA. The company attributes its success to AI innovations and strategic partnerships, notably the launch of the PROS Copilot for Sales Plugin in collaboration with Microsoft (NASDAQ:MSFT).
PROS Holdings also announced new customer acquisitions and expansions, setting a positive tone for future developments. The company has raised its full-year guidance, projecting a significant increase in services revenue for the latter half of 2024. It anticipates an adjusted EBITDA between $17.0 million and $20 million for the second quarter, a year-over-year improvement.
Despite a positive outlook, PROS Holdings remains cautious, focusing on maintaining consistent sales cycle times and improving win rates. The company sees the travel business recovering, with B2B sales remaining a primary growth driver. The integration of Microsoft Copilot is expected to enhance sales processes and increase visibility within the Microsoft ecosystem.
InvestingPro Insights
Amidst the analyst downgrade and market challenges faced by PROS Holdings, real-time data from InvestingPro provides a deeper financial perspective on the company's current standing. With a market capitalization of approximately $1.26 billion, the company's valuation metrics reflect its growth and profitability challenges. The price-to-earnings (P/E) ratio stands at -25.45, indicating that the company is not currently profitable. This aligns with the InvestingPro Tip that PROS Holdings has not been profitable over the last twelve months, underscoring the concerns raised by Craig-Hallum.
Furthermore, the company's stock is trading near its 52-week low, which could represent an opportunity for investors who believe in the company's long-term strategy and are willing to endure the short-term volatility. This is particularly relevant as analysts predict the company will become profitable this year, according to another InvestingPro Tip. However, it is important to note that PROS Holdings does not pay a dividend, which might be a consideration for income-focused investors.
For those interested in a comprehensive analysis of PROS Holdings, including additional InvestingPro Tips, visit https://www.investing.com/pro/PRO. Keep in mind that there are many more tips available on InvestingPro, and by using the coupon code PRONEWS24, readers can get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription.
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