AVDX - AvidXchange: Positive Outlook And Attractive Valuations

2023-03-06 05:47:00 ET

Summary

• Both AvidXchange top line and bottom line for Q4 2022 exceeded expectations thanks to higher-than-expected float revenue and better-than-expected cost management.
• AVDX expects to be EBITDA-positive for full-year 2023, which is a year earlier than its prior guidance; the company also continues to move closer to achieving its 75% gross margin target.
• My rating for AvidXchange stock is a Buy, taking into account its positive outlook and attractive valuations.

Elevator Pitch

I assign a Buy investment rating to AvidXchange Holdings, Inc.'s ( AVDX ) shares. The 2023 financial outlook for AVDX is favorable considering expectations of EBITDA profitability, while the stock is attractively valued based on a peer comparison.

Company Description

AVDX describes itself as a "provider of accounts payable automation software and payment solutions for middle market businesses and their suppliers" in the company's press releases .

The Key Products That AvidXchange Offers To Its Clients

AvidXchange derived 68%, 31%, and 1% of the company's full-year fiscal 2022 revenue from payments (AvidPay Direct and Invoice Accelerator as highlighted above), software (accounts payable automation SaaS solution), and services, respectively, as per its most recent 10-K filing .

Above Expectations Q4 2022 Financial Results

AvidXchange revealed the company's financial performance for the final quarter of last year on March 1, 2023 before the market opened.

Revenue for AVDX increased by +24% YoY and +5% QoQ to $86.2 million in Q4 2022. AvidXchange actual fourth quarter top line also turned out to be +1% higher than the Wall Street's consensus sales forecast of $85.3 million .

At its Q4 2022 earnings briefing, AvidXchange attributed the top line beat to higher than expected "interest revenues from customer funds" (float revenue) driven by the "management of our buyer customers full payment file" and "the remaining paper checks."

AVDX's non-GAAP adjusted EBITDA narrowed substantially from -$8.2 million for Q4 2021 and -$3.7 million for Q3 2022 to -$1.3 million in the most recent quarter. In comparison, the sell-side analysts had anticipated that AvidXchange's actual Q4 2022 EBITDA loss would have been significantly wider at -$4.5 million as per S&P Capital IQ's consensus data.

The company's Q4 2022 non-GAAP adjusted earnings per share or EPS of -$0.04 was much better than the analysts' consensus bottom line estimate of -$0.09 per share (source: S&P Capital IQ ). This also marked a meaningful improvement from AvidXchange's normalized EPS of -$0.06 and -$0.10 for Q3 2022 and Q4 2021, respectively.

AvidXchange noted at its recent fourth quarter investor call that "expense control" was the key reason for the company's narrower than expected losses.

Positive Fiscal 2023 Outlook

Looking ahead, AvidXchange is guiding for an adjusted EBITDA of $1.75 million (mid-point of guidance) for the current fiscal year. This is significant, as AVDX had previously expected to become profitable at the EBITDA level by FY 2024.

In my opinion, it is realistic for AvidXchange to achieve EBITDA profitability one year earlier in FY 2023.

One key driver is float revenue. As discussed in the preceding section, the company's float revenue came in higher than expectations for Q4 2022. Moving forward, AVDX had guided at the company's most recent quarterly results call that it expects float revenue to jump by +173% to $30 million in 2023 representing approximately 8% of its current year top line guidance.

The other key driver is further gross margin expansion. AvidXchange's non-GAAP adjusted gross profit margin improved by +270 basis points YoY from 62.2% in the fourth quarter of 2021 to 64.9% for Q4 2022. AVDX highlighted at its Q4 2022 investor briefing that it has successfully relied on "automation to markedly reduce our unit costs." Taking into account the company's gross profit margin goal of 75% for the long run, it is reasonable to expect AVDX to report higher gross margin in this fiscal year and move a step closer to its long term profitability target.

Attractive Valuations

The market currently values AvidXchange at 4.6 times consensus forward next twelve months' Enterprise Value-to-Revenue based on S&P Capital IQ's consensus valuation data. Since its public listing in October 2021, AVDX has traded at a relatively higher mean forward Enterprise Value-to-Revenue multiple of 6.4 times.

Peer Valuation Comparison For AvidXchange

Source: S&P Capital IQ

Separately, AvidXchange is trading at a significant discount to the company's listed peers based on the forward Enterprise Value-to-Revenue metric as highlighted in the peer valuation comparison table presented above. AVDX's expected revenue growth for 2023 is slightly slower than two of its peers, but this doesn't justify such a wide valuation gap between AVDX and its peers. AvidXchange trades at a mid-single digit forward Enterprise Value-to-Revenue multiple now, while the market values other companies at a high single digit ratio.

I think that AvidXchange is in a good position to narrow the valuation gap with its peers, as the company delivers on its guidance of achieving EBITDA profitability by the current year.

Closing Thoughts

AvidXchange's shares are rated as a Buy. AVDX's valuations are appealing, and a positive valuation re-rating for the stock is expected considering the company's positive EBITDA guidance for 2023.

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