2023-12-03 06:48:58 ET
Summary
- BILL's shares have plummeted by nearly 40% after the company reduced its growth outlook for fiscal 2024 due to macro challenges.
- Despite the guidance cut, it is still a strong long-term investment with impressive growth rates and a severely diminished valuation.
- The company's diversified revenue streams, benefit from the high interest rate environment, and automation push contribute to its positive outlook.
- The stock is now cheap at ~5x forward revenue.
While most tech stocks are riding on YTD highs on the back of lower interest rate expectations, there are a few notable holdouts. BILL Holdings (Bill.com) ( BILL ), the payment-processing software company dedicated toward the SMB (small and mid-sized business) market, has suffered a tremendous loss of confidence after the company reduced its growth outlook for fiscal 2024, citing macro challenges. In theory, macro has had a hand in the company's results all year long - and so the fact that Bill.com is citing worsening macro impacts, while most other tech companies are saying that macro challenges remain but have stabilized, is causing deep concern.
In the aftermath of its guidance update and earnings release, shares of Bill.com have wiped out all of their YTD gains and are now sitting at a YTD loss of nearly 40%:
Despite guidance cut, Bill.com remains a stellar long-term investment
I last wrote a bullish opinion on Bill.com in June, citing the company's strong growth rates, high gross margins and profit scaling potential as the core drivers. I acknowledged at the time as well that Bill.com's valuation multiple was a little heady - but that premium valuation was counterbalanced by incredibly strong growth rates.
Now, the situation has more or less reversed. Bill.com shares fell in lowering its guidance outlook from a prior view of $1.29-$1.31 billion (22-24% y/y growth) to $1.205-$1.245 billion in revenue, or 14-18% y/y growth. It's a sharp fall from grace for a company that as recently as two quarters ago, in Q3, was growing north of >60% y/y. On top of potential macro impacts, comps are getting tougher, especially as the company starts to comp rising interest rates last year - so the contribution to growth from "float" revenue, which had essentially no compare in FY22, is declining.
We should also note there's a good chance Bill.com's initial outlook is quite conservative. Q1 growth (which we'll discuss in more detail in the next section) clocked in at a healthy 33% y/y. By setting initial expectations low, Bill.com may be setting itself up for a string of "beat and raise" quarters in FY24.
I'd also argue that Bill.com's lower growth risk is more than offset by its severely diminished valuation. At current share prices near $68, Bill.com trades at a market cap of $7.27 billion. After we net off the $2.65 billion of cash and $1.84 billion of debt on Bill.com's latest balance sheet, the company's resulting enterprise value is $6.46 billion.
Against the midpoint of Bill.com's latest revenue outlook, the stock trades at just 5.3x EV/FY24 revenue - arguably quite cheap for a company that grew at >30% y/y in its most recent quarter, has mid-80s pro forma gross margins, and traded at mid-teens revenue multiples amid the pandemic.
As a reminder for investors who are newer to this name, here is my full long-term bull case for Bill.com:
- Growth at scale, despite recent guidance cut. Despite already reaching a >$1 billion annualized revenue run rate, Bill.com is still managing to grow revenue at an impressive >30% y/y growth pace (and note here that the company's major recent acquisitions of Invoice2Go and Divvy are now fully comped).
- Diversified revenue streams. Bill.com monetizes its platform in a number of ways, generating revenue from subscription fees, taking a slice of payment transactions, and earning interest on funds held on customers' behalf (float).
- Float revenue will benefit from the high interest rate environment. Float is now contributing just over 10% of the company's revenue, from virtually nothing during the low interest-rate era, and this is a "free" way to help boost Bill.com's margins.
- Automation push. Right now at a time when AI and automation are hot buzzy topics, there is growing interest to automate manual processes and chase as much efficiency as possible - which are all part of Bill.com's core DNA.
- Sky-high gross margins. Bill.com's high-80s gross margins are unparalleled in the industry. As the company continues to grow its customer base and take over a greater portion of these clients' transactions, the fact that Bill.com's revenue nearly all flows to the bottom line will help the company dramatically expand its profitability.
All in all, I remain bullish on Bill.com. Stay long here and use the dip as a buying opportunity.
Q1 download
Let's now go through Bill.com's latest fiscal Q1 (September quarter) results in greater detail. The Q1 earnings summary is shown below:
Bill.com's revenue grew 33% y/y to $305.0 million, ahead of Wall Street's expectations of $298.6 million (+30% y/y). Breaking apart Bill.com's revenue by its components, it's not difficult to see why growth is expected to decelerate to some degree. Subscription revenue, arguably the most stable revenue component for Bill.com, grew 7% y/y to $62.4 million. Transactional revenue grew 30% y/y to $202.7 million. And float revenue grew at a nearly 3x y/y pace to $39.8 million.
Float will decelerate as we move through FY24, as we start to lap the Fed's aggressive interest rate increases in the first half of calendar 2023. And transactional revenue - the most variable portion of Bill.com's business - is the most subject to macro conditions and consumer spending.
Yet in my view, many factors are still moving in the right direction for Bill.com. The company's count of paying customers still grew 12% y/y to 471k - a large, diverse customer pool that isn't overexposed to any company or industry. Net customer adds in the quarter tallied up to 9.3k. Transactions processed grew 26% y/y to 25 million, and total payment volumes processed on the Bill.com network grew 8% y/y to $80 billion in the quarter.
Here is helpful anecdotal commentary from CEO Rene Lacerte's remarks on the Q1 earnings call , detailing the slowdown that the company is anticipating this fiscal year:
While our performance exceeded our outlook and strong customer adoption continued, we started to see more intense macro pressure on our business related to spend late in the quarter, and that has continued through October. As a result of higher interest rates and tighter credit markets, capital and cash have become less affordable and available for SMBs. Some of our larger businesses have scaled back their spend while both customers and their suppliers became more selective with their payment choices. Business behaviors changed rapidly in this respect. This has impacted our fiscal year outlook, which John will talk about more in a few minutes.
We are taking actions to adjust to this new environment and are confident in our ability to navigate the short-term macro challenges while continuing to invest behind the long-term opportunity at hand. SMBs are often forgone when things are most challenging for them, serving SMBs is our North Star, and we will not forget them as we work to create more value for them and their suppliers in this market. We know these headwinds are only temporary and that our long-term focus on innovation, combined with the strength of our business model will help millions of businesses transform their financial operations while building an exceptional business.
I'm confident in our ability to execute given our history of responding to the dynamic environments in the past, and we will continue to get stronger."
To me, however, this remains more of a short-term dynamic, and we should focus more on the longer-term wins that the company is securing: adding to its customer counts, and continued gross margin leverage (up a further 30bps y/y in the quarter to an impressive 86.1%).
From an overall profitability standpoint, the company generated $33.4 million of pro forma operating income in the quarter, up nearly 4x y/y and representing an 11% pro forma operating margin: versus just 4% in the year-ago quarter.
We note that at least this quarter, Bill.com's combination of >30% revenue growth and 11% pro forma operating margins still positions the company within the "Rule of 40".
Key takeaways
Bill.com remains an excellent long-term buy. Well-positioned with strong gross margins and a rapidly scaling bottom line, I think the company can quickly maneuver through short-term macro challenges and continue to dominate the small-business payments space. Stay long here and buy the dip.
For further details see:
BILL Holdings: Buy The Crash