AVDX - AvidXchange: Bullish On Middle Market Focus And New Partnership

2023-11-10 16:31:48 ET

Summary

• AvidXchange's Q3 2023 results exceeded expectations, as it achieved a revenue beat of +4% and reported positive EBITDA in the recent quarter.
• The company's focus on the middle market segment, rather than small-to-medium sized businesses, implies that its revenue is relatively more defensive.
• A new partnership with AppFolio is expected to drive future growth for AvidXchange.
• My rating for AVDX is a Buy, following my analysis of the company's client base and its new AppFolio partnership.

Elevator Pitch

I rate AvidXchange Holdings, Inc. ( AVDX ) stock as a Buy.

In my initiation article for AVDX written on March 6 this year, I highlighted that AvidXchange's financial prospects for the current year are good. AVDX's better-than-expected results for the third quarter of 2023 as detailed in this write-up validates my bullish opinion regarding the company's future financial performance.

I continue to deem AVDX's shares as worthy of a Buy rating, taking into account the company's focus on middle market clients and the AppFolio partnership's potential boost to its intermediate top line growth outlook.

AVDX's Recent Quarterly Results Surpassed The Market's Expectations

AvidXchange revealed its Q3 2023 performance with its most recent quarterly earnings press release issued on November 8 before trading hours.

AVDX's top line rose by +8% QoQ from $91.2 million for the second quarter of this year to $98.7 million in the third quarter of 2023. The YoY revenue growth for AvidXchange also accelerated from +19.1% in Q2 2023 to +19.7% in Q3 2023. Furthermore, the company's actual Q3 2023 sales exceeded Wall Street's consensus revenue projection of $94.8 million by +4%. As per AVDX's management commentary at the company's Q3 2023 earnings briefing , AvidXchange's third quarter revenue beat was driven by "higher transaction volumes and yield expansion."

Separately, the company reversed from net losses of -$11.7 million in Q3 2022 and -$0.5 million in Q2 2023 to achieve a positive normalized net income of +$5.8 million for the most recent quarter. Prior to AvidXchange's actual third quarter results disclosure, the sell-side analysts were predicting that AVDX would be loss-making in Q3 2023 . AvidXchange credited its above-expectations Q3 earnings to "continued gross margin expansion, unit cost reduction and continued scaling of our operating expenses" at its third quarter results call. This means that positive operating leverage, or rising revenue on a fixed expense base, was a major factor that was responsible for AVDX's better-than-expected profitability.

It was apparent that investors liked AvidXchange's recent set of results, as AVDX's stock price surged by +15.2% on November 8, before rising by an additional +2.4% on November 9.

Focus On The Middle Market Segment Makes A Big Difference

I emphasized in my early-March initiation piece for AvidXchange that the company offers "accounts payable automation software and payment solutions for middle market businesses."

The focus on the middle market segment (as opposed to small-to-medium sized businesses or SMBs) explains why AVDX's sales have been affected by macroeconomic challenges to a much lesser degree. At the company's Q3 results briefing, AvidXchange stressed that middle market companies have corporate lifespans that are on average four times as long as their SMB counterparts. AVDX also noted at its third quarter earnings call that SMBs typically generate sales of below $5 million every year, while middle market businesses' yearly revenues range from $5 million to $1 billion.

In contrast with companies which mainly serve SMBs, it is reasonable to assume that AVDX's revenue is relatively more defensive thanks to its middle market client base. The differentiated customer base focus has given AvidXchange the confidence to revise its full-year fiscal 2023 guidance upwards in a significant manner. Specifically, the mid-point of AVDX's expected FY 2023 top line and EBITDA were increased by +2% and +200% to $375.0 million and $22.5 million, respectively. The updated management guidance for AVDX after its Q3 results translated into a +19% revenue growth for FY 2023, and it is noteworthy that AvidXchange was loss-making at the EBITDA level in FY 2022.

New AppFolio Partnership Will Help To Drive Future Growth

In tandem with its Q3 2023 earnings release, AvidXchange also disclosed that it entered into a "partnership with AppFolio" to "provide customers in the real estate industry with a simple, streamlined workflow for automated invoice processing, approvals, and payments."

AVDX highlighted a number of metrics associated with AppFolio at its Q3 earnings briefing, which helps investors to understand why this new partnership is a very important corporate development for AvidXchange.

Firstly, AppFolio is a leading player in the real estate software space with a meaningful client base exceeding 19,000 companies.

Secondly, AvidXchange shared at its most recent quarterly results call that more than half of "the AppFolio customers fit within our (AVDX's) target profile." This implies that AVDX is more likely to deliver greater revenue synergies with the AppFolio partnership as compared to other partners due to the strong client fit.

Thirdly, AVDX referred to the AppFolio partnership as "the largest accounting system partnership we've ever done" and noted its "20-plus year heritage in the real estate vertical" at the company's third quarter results briefing. In other words, the tie-up with AppFolio is a critical partnership in terms of size and AppFolio operates in an industry (real estate) that AvidXChange is also deeply rooted in.

AvidXchange is of the view that the first three years of any partnership tend to be the period when the partnership is the most impactful. As such, I expect the AVDX-AppFolio collaboration to have a positive effect on AvidXchange for the medium term or the coming three years.

Concluding Thoughts

I hold the opinion that AvidXchange's business operations will continue to perform well in the foreseeable future considering the positives associated with the new AppFolio partnership and the "defensiveness" of its middle market customer base.

Also, AVDX's shares are still attractively valued. AvidXchange trades at a consensus forward next twelve months' Enterprise Value-to-Sales or EV/S multiple of 3.8 times (source: S&P Capital IQ ). As a comparison, BlackLine, Inc. ( BL ), nCino, Inc. ( NCNO ), and Workiva Inc. ( WK ) (AvidXchange's peers) are valued by the market at higher EV/S ratios of 5.4 times, 6.2 times, and 6.7 times, respectively as per S&P Capital IQ data.

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