2023-11-03 12:15:02 ET
Summary
- BILL Holdings, Inc. reported surprising fiscal Q1, 2024 results, leading to a dramatic selloff and uncertainty about its growth prospects.
- The company provides financial automation software for SMBs, but faces challenges in the current market environment.
- The stock valuation is not particularly expensive, but the company's growth trajectory and heavy reliance on stock-based compensation raise concerns.
Investment Thesis
BILL Holdings, Inc. ( BILL ) reported fiscal Q1 2024 results that took investors by surprise. The wrong kind of surprise.
I'll be the first to admit that while I was troubled by BILL's high valuation, I didn't see such a dramatic selloff coming. However, I won't compound my mistake.
This stock is going to move to ex-growth. I describe here what this means, in practical terms, and what readers should do about their holding.
Rapid Recap
In my previous analysis, I 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.
And went on to conclude,
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.
Now, on the back of these results, we are once more reminded of how difficult it is for businesses to grow in a high-interest rate environment.
BILL Holdings' Near-Term Prospects
Bill Holdings provides financial automation software primarily for small and midsize businesses (''SMBs''). Their platform streamlines various financial processes, including managing payables, receivables, spend, and expense management.
By leveraging their robust network, Bill Holdings helps businesses efficiently handle their financial transactions, making it easier for them to control their cash flow, process invoices, and collaborate with their suppliers and clients.
Also, they do payment services, invoice financing, and purchase order matching, among others. Through partnerships with accounting firms and financial institutions, they aim to expand their reach and offer their services to a broader audience. Overall, Bill Holdings focuses on simplifying financial operations for SMBs, allowing them to thrive in their respective industries.
Revenue Growth Rates Drop to Sub-20% CAGR
Bill faces several challenges in the current market environment, including a muted spend landscape impacting its total payment volume (''TPV'') estimates.
The company highlights the cautious approach it is taking due to the lower spend per transaction, largely influenced by macroeconomic trends and the introduction of more friction between buyers and suppliers seeking to reduce the cost of acceptance.
Moreover, changes in supplier behavior, particularly among larger suppliers, have posed challenges to the adoption of some of Bill's higher monetizing products such as virtual cards and foreign exchange ((FX)).
More specifically, what's weighing on the stock is that BILL has lowered its revenue growth rate outlook. As a growth company, many sins can be forgiven, as you know. But what you cannot do is slowdown your growth unexpectedly. Because if your stock is richly priced, and you deliver a negative surprise, your stock gets put in the penalty box, and it's a challenge to get out.
BILL Stock Valuation -- 32x Forward EPS
Here's the thing, as it stands right now, I don't believe that BILL is richly priced. I believed it was richly priced before, and I noted as much. But at around 30x to 35x EPS, that's a very reasonable entry point. That's why I won't downwards revise this stock to a sell.
But the problem that BILL now faces has to do with its investor base. Previously, its investor base was all about growth. They were growth-oriented investors. But now that BILL has become ex-growth, there will be a new investor base appraising the stock anew.
In practical terms, this means an investor that is more cautious, calculating, and more attentive to BILL's underlying profitability.
And here, the plot thickens again.
The fact of the matter is that BILL is clearly growing its free cash flow at a very rapid rate. I don't believe anyone can say otherwise.
That being said, the problem here is that more than 100% of this free cash flow is made of stock-based compensation, or SMB.
Again, when the company is delivering very strong growth rates, a lot of sins can be forgiven. But when the company becomes ex-growth, all of a sudden, what was only a pesky detraction becomes one challenging element too much.
The Bottom Line
Considering the recent surprising turn of events and the unexpected sell-off, it's becoming increasingly difficult to confidently assess the state of BILL Holdings.
While the current BILL Holdings, Inc. stock valuation at around 32 times forward EPS doesn't strike me as particularly expensive, it's equally challenging to argue that the stock is positioned in the bargain basement.
With the company facing uncertain prospects in a high-interest rate environment and confronting a more cautious investor base, it's becoming apparent that the once-thriving growth trajectory might be faltering.
As concerns about the underlying profitability and the heavy reliance on stock-based compensation continue to linger, it's leaving investors like myself in a state of uncertainty, questioning the sustainability of the company's financial performance moving forward.
I'll stick to the sidelines with BILL Holdings, Inc. stock.
For further details see:
BILL Holdings FQ1 Earnings: Steer Clear Of This Drama