EXFY - Expensify: A Wait-And-See Approach Is Appropriate

2023-09-27 03:37:38 ET

Summary

• Looking forward, Expensify is expected to deliver slower revenue growth and weaker margins than what the company achieved earlier.
• Expensify's key valuation metrics are currently at their lowest since the company's IPO in late 2021.
• I have a Hold investment rating for EXFY stock; it is wise to adopt a wait-and-see approach for the stock now considering both its valuations and outlook.

Elevator Pitch

My rating for Expensify, Inc. ( EXFY ) stock is a Hold.

I reviewed EXFY's financial performance for the first quarter of the current year and highlighted the company's plans for share repurchases in my May 15, 2023 initiation article .

I still rate EXFY as a Hold, as I think it is best to have a wait-and-see approach for Expensify's shares now. Expensify's key valuation metrics are at their historical lows, but the company's revenue and profitability prospects are unfavorable. I am of the view that one should consider an investment in EXFY stock when there are signs of significant top line growth acceleration and margin expansion. For now, a Hold rating for Expensify is fair.

Stock Price Drop Was Driven By Q2 Miss And Negative Sell-Side Sentiment

Expensify's shares have almost halved since the publication of my initiation article in mid-May this year with a -46.8% fall (source: Seeking Alpha price data) in its stock price.

There are two major factors that are likely responsible for EXFY's weak share price performance in the last four and half months.

The first key factor is Expensify's Q2 2023 results miss.

EXFY's share price dropped by -28.6% on August 9, 2023, a day after it released its second quarter results. Expensify's YoY revenue decline worsened from -0.7% for Q1 2023 to -9.9% in Q2 2023. EXFY's actual second quarter top line of $38.9 million turned out to be -6.3% below the analysts' consensus forecast of $41.5 million . The Q2 2023 normalized net loss per share of -$0.01 for Expensify was also a negative surprise, as the market had expected EXFY to report a positive non-GAAP adjusted EPS of +$0.05.

I indicated in my May 2023 update that "EXFY's profitability outlook for Q2 FY 2023 isn't encouraging" with expectations that "selling and marketing expenses should see an uptick." This was exactly how things panned out. Expensify acknowledged at its Q2 2023 results call that "we're in a bit of a rebuilding phase right now" and noted there were "some heavy investments we made" for the second quarter.

The second factor that drove the collapse in Expensify's stock price in recent months was negative sell-side sentiment

Seven of the eight Wall Street analysts with EXFY in their coverage universe cut their FY 2023 bottom line projections for the company in the last three months. Specifically, the market's consensus full-year EPS estimate for Expensify was lowered by a substantial -62.2% to $0.09 during the same time period. This also implies that the sell side sees Expensify's bottom line decreasing by -71.3% for the current fiscal year.

JPMorgan ( JPM ) recently initiated on Expensify's shares with a "Underweight" rating based on its opinion that EXFY offers "limited differentiation vs. competitors" as noted in Seeking Alpha News' September 15, 2023 article . This sell-side research firm's views seem to be somewhat aligned with EXFY's comment in its Q2 2023 results release that the company is currently "weathering the combined fire of our competition" in the "heavily contested corner of the market."

In general, the analysts do seem to have an unfavorable view of EXFY as a potential investment candidate. Only a quarter of the analysts covering Expensify have a Buy call for the stock, which stands in contrast with most listed equities which usually have a majority of their investment ratings as a Buy.

In the next section, I assess if there is a high probability of a turnaround in Expensify's business and a recovery in its share price.

Financial Prospects And Share Price Outlook Are Murky

The consensus financial forecasts for Expensify suggest that the company's future top line growth and profit margins might not be as good as they were in the past, and this appears to be consistent with EXFY's management commentary.

Based on S&P Capital IQ data, Expensify's consensus FY 2023-2027 revenue CAGR estimate is +10.9%. In comparison, EXFY's grew its top line by +62.2% and +18.7% for FY 2021 and FY 2022, respectively. In its latest Q2 2023 results release, Expensify did away with the usual reference to its +25%-35% top line expansion CAGR target for the long run. At its recent second quarter results briefing, EXFY explained that it didn't want to offer "outdated long-term guidance", as there has been an absence of "normal or stable economic conditions" in the past couple of years.

With regards to profitability, EXFY achieved an EBITDA margin of 25.1% last year. But the market sees Expensify registering low-to-high teens percentage EBITDA margins between FY 2023 and FY 2025 as per consensus financial projections. Expensify guided at the Q2 earnings call that it is "hopeful that we can start to tighten up our margins a little bit more" in 2H 2023. It is reasonable to infer from these comments that a significant recovery in EXFY's profit margins for the near term is less likely.

On the flip side, Expensify's share price could find some support even though its business outlook is disappointing.

Based on its last done stock price of $3.15 as of September 26, EXFY's consensus forward Enterprise Value-to-Revenue, EV/EBITDA, EV/EBIT multiples were 1.46 times, 9.3 times and 10.9 times, respectively. These represent all-time historical trough multiples for Expensify since its public listing in November 2021. As another way to assess EXFY's current valuations, the lowest sell-side price target for Expensify is $5.00 (source: S&P Capital IQ ), which is still above its last traded share price.

Concluding Thoughts

It is too early to turn bullish on Expensify, even though its key valuation multiples have already declined to their respective historical lows. EXFY has withdrawn its long term top line growth guidance for now, and a meaningful improvement in the company's profit margins for the near term seems unlikely. Therefore, Expensify warrants a Hold rating.

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