AVDX - AvidXchange Holdings: Stock Should Perform In 2H23

2023-04-01 04:50:10 ET

Summary

• AVDX's lackluster performance since the release of 4Q22 earnings is likely due to slowing B2B spending among AVDX's customer base.
• AVDX's FY23 outlook implies core revenue growth of around 12% at the midpoint, which is below management's medium-term organic growth.
• AVDX needs to provide more organic top-line growth and better customer adds to boost investor confidence in the company's long-term trajectory.

Overview

The lackluster performance of AvidXchange (AVDX) stock since the release of 4Q22 earnings is likely attributable to slowing B2B spending among AVDX's customer base. Furthermore, FY23 Float income of $30 million is assumed in the below-consensus revenue guidance, indicating that underlying revenue growth is anticipated to be in the high single digits. On a standalone basis, it might not be as bad. However, when compared to another B2B payments peer like Bill.com (BILL), AVDX guidance does not seem to be conservative, but rather is reflecting market trends as they stand. While this may make sense in light of the more robust nature of the middle market customer base, I fear it will put AVDX at a competitive disadvantage. A major recession could have a significant impact on AVDX's middle market clients because of the current uncertain macro environment. Even though I think the slowdown in B2B spending is cyclical and reflective of an industry-wide phenomenon, it is still a cloud that could end up offsetting AVDX's better message on the accelerated profitability timeline. However, I am optimistic about the progress the company has made on important projects, such as the upcoming release of Invoice Accelerator 2.0 in the second half of 2023. This is expected to aid in boosting the company's revenue growth after the temporary macroeconomic downturn. Additionally, I am encouraged by the positive comments made about the Intelligent Data Capture initiative. With Microsoft's help and the use of AI/ML, Intelligent Data Capture automates the digitization process for paper invoices, which should lead to greater operational efficiency. Due to the current process, wherein AVDX employees manually digitize non-digital invoices, I anticipate this to have a profound effect.

AVDX is trading at a forward multiple of 3.2x revenue, which, in my opinion, reflects the company's moderating growth profile. In fact, AVDX saw a decrease in customer growth year over year in 2022. I think if AVDX can beat consensus, the stock would see a very strong re-rating because the market has already factored in the weaker growth outlook ahead. But I believe that AVDX needs to provide more organic top-line growth and better customer adds to boost investor confidence in the company's long-term trajectory. My overall rating is shifting from a buy to a hold (until 2H23), with a continued recommendation to buy in the longer term.

4Q22 overview

AVDX reported 4Q22 results that were in line with expectations, with revenue matching consensus but adjusted EBITDA profitability exceeding expectations. 4Q organic growth of 23.3% was supported in part by an increase in take rates. I should note, however, that the volume of payments and the pace at which transactions are processed seem to be levelling off. Among the highlights of AVDX's FY23 outlook is the pulled-forward of the company's adjusted EBITDA profitability timing to FY23 from FY24. The new midpoint estimate for adjusted EBITDA for FY23 from management is $1.8 million. However, AVDX's forecast for FY23 revenue was lower than anticipated (which I think is because management is balancing between growth and EBITDA profitability). Specifically, AVDX expects revenue growth in FY23 of 14.5% y/y, which is lower than their medium-term organic growth expectation of 20% y/y.

Growth expectation

AVDX's FY23 outlook, after taking into account interest income and political spend comparisons, seems to imply core revenue growth of around 12% at the midpoint, which is significantly below management's medium-term organic growth expectation of 20%. Macroeconomic factors and moderating trends in customer retention were cited by management as major challenges. However, I believe all these concerns will become less important as we move through FY23, where investors will begin to think about the possibility of reacceleration in FY24, an election year, and the longer-term success of scaling integrations and product launches like Invoice Accelerator 2.0. As such, the stock might be rangebound in the near-term and only start drifting upwards in late 2H23. Importantly, I was impressed by AVDX's decision to bring forward the year they expected to turn a profit on adjusted EBITDA from FY24 to FY23. While growth has slowed, I believe this move has gathered the interest of investors that are looking for profitable growth. In addition, this demonstrates how management views operational efficiency and cost discipline as paramount. Like any other company shifting from a growth-focused to a profitable growth model, I believe AVDX needs to prove to investors that it can keep up its strong organic growth momentum.

Macro backdrop

As was to be expected, AVDX's clientele have recently begun cutting back on their spending on discretionary items like advertising. However, one important point to make is that, unlike the SMB-focused BILL, AVDX has not seen much softening beyond that. In spite of a slight increase in sales cycle time, which I attribute to an increase in the frequency with which clients delay decisions, AVDX has maintained its top-of-the-funnel replenishment and close rates. I think the one metric that reflects all of these is the transaction revenue retention rate, which AVDX exited FY22 at around 103%. Pre-pandemic, that rate has been around 104 to 105%, which I think AVDX should eventually move towards too, albeit FY23 might see a further dip. The way I see all of this is FY23 is going to be a blip in the overall long-term performance. This is inevitable as all economy has cycles. The fact that AVDX can exit FY22 with position transaction revenue retention rate clearly suggest that they are in good position to tide this cycle.

Conclusion

In conclusion, the lackluster performance of AVDX stock since the release of 4Q22 earnings is likely due to slowing B2B spending among AVDX's customer base, and the company's FY23 revenue guidance being below consensus. However, I am optimistic about AVDX's progress on important projects, such as the upcoming release of Invoice Accelerator 2.0 and the Intelligent Data Capture initiative. Although AVDX's growth has slowed, I am impressed with management's decision to bring forward the year they expected to turn a profit on adjusted EBITDA from FY24 to FY23. While AVDX needs to provide more organic top-line growth and better customer adds to boost investor confidence, I believe the stock has potential for a strong re-rating if it beats consensus. As such, my overall rating for AVDX is shifting from a buy to a hold (for the short-term), with a continued recommendation to buy in the longer term.

For further details see: