2023-09-06 08:00:00 ET
Summary
- BILL's rapid growth and profitability are impressive, but the stock's valuation at over 55 times non-GAAP EPS raises doubts about upside potential.
- The vast total addressable market and disruptive narrative are appealing, but investors may find the current valuation too rich.
- While BILL serves a substantial number of SMBs, the question remains whether paying a premium for the stock is justified given the uncertainty about its future growth.
Investment Thesis
BILL Holdings ( BILL ) has many positive considerations going for it. Not only is its revenue line rapidly growing, but also, its profitability continues to point toward consistent and fast improvements.
What's more, its disruptive narrative has ample appeal, after all, its business's total addressable market is vast, encompassing the financial operations and B2B payment needs of millions of small and medium-sized businesses in the United States and globally, a large amount of which still operate with paper-based processes.
All that being said, pushing its narrative aside, and focusing squarely on the upside potential, I find that paying more than 55x this year's non-GAAP EPS is too rich and does not provide me with enough upside potential.
Why BILL Holdings? Why Now?
Bill Holdings specializes in providing financial automation software tailored for small and medium-sized businesses ("SMBs"). Its primary goal is to simplify business operations by connecting businesses with their suppliers and clients.
Its customers' businesses can efficiently manage payables, receivables, expenses, and spending management. BILL integrates with popular accounting software and payment processors, simplifying the financial processes for SMB customers.
At its core, BILL simplifies and optimizes financial operations for SMBs by managing payables and receivables while saving time and reducing errors.
Echoing this value proposition, this is what BILL's CFO John Rettig stated on the earnings ,
Today, we serve hundreds of thousands of SMBs, but we want to serve millions more. There are 30 million small businesses in the US and 70 million globally. The majority still use manual paper-based processes to manage their financial back office.
[...] As the creator of this category and with our leading platform, payments expertise, large network, partner ecosystem, and scale we are uniquely positioned to capture these large greenfield opportunities.
Moreover, as a high-quality two-sided network, BILL emphasizes that ease of use and efficient payment transactions between businesses serve as a critical foundation for its platform. Further, the trust that SMBs have in the process allows more and more customers to join its platform - see below.
BILL stand-alone customers grew to 201K, up 27% y/y. This figure includes Financial Institutional customers which were down slightly, primarily due to the sunset of BILL's legacy platform for BofA's customers which impacted approximately 6,000 Financial Institutional customers. Nevertheless, the path appears to point towards more and more customers joining its platform.
Next, we'll analyze BILL's financials.
Revenue Growth Rates Remain Solid
For a business that predominantly caters to SMBs, it must be said that BILL is holding up really well. Even though it delivers more than $1.5 billion of annualized revenues, BILL continues to grow at more than 30% CAGR.
That being said, the guidance for the remainder of the fiscal 2024 points towards decidedly less than 30% CAGR. On the other hand, BILL has a very long history of being very conservative with its guidance, see below.
Accordingly, I suspect that BILL will probably close fiscal 2024 with a high 20s% to 30% CAGR.
But the best news of all is the progress that BILL continues to make on its underlying profitability.
Profitability Profile Set to Improve
BILL ended fiscal 2023 with non-GAAP operating profit margins of 11%. Meanwhile, looking ahead, its guidance points for fiscal 2024 points to approximately 18% non-GAAP operating margins.
So there's no question that BILL's growth prospects and underlying profitability are pointing in the right direction. In fact, I don't believe that consideration has ever been in question to any great extent.
The problem for investors is whether having to pay 58x this year's EPS provides investors with enough upside potential. And that's really the problem, I'm not sure that's such an attractive entry point.
The Bottom Line
BILL Holdings appears to have several positive factors working in its favor. Its revenue is showing robust growth, and the path to profitability seems to be on track. The company's disruptive narrative is undoubtedly intriguing, especially considering its expansive addressable market that caters to the financial operations and B2B payment needs of numerous small and medium-sized businesses, many of which still rely on outdated paper-based processes.
However, the more I delve into this investment opportunity, the more uncertainty creeps in. The prospect of paying over 55x this year's non-GAAP EPS feels quite steep, and I'm left wondering if it truly offers sufficient upside potential to justify such a valuation.
While there's no doubt that BILL is on the right track with its growth and profitability, the looming question remains: Is the current valuation attractive enough to warrant investment at this stage? I'm not compelled enough to part with my hard-earned capital at this juncture, but I'll happily revisit this again soon.
For further details see:
BILL Holdings: A Lot Of Its Upside Is Already Priced In