2023-04-13 07:27:56 ET
Summary
- BILL has solid growth ahead of it as its network creates a flywheel effect.
- The company is also benefiting from higher interest rates, generating float revenue.
- Given its growth, the stock looks attractively priced.
BILL Holdings ( BILL ) has strong growth ahead of it and trades at an attractive valuation. While it faces some economic headwinds, it's riding some strong secular trends and benefiting from higher interest rates.
Company Profile
BILL is a platform for small and midsized businesses (SMBs) that helps them simplify, digitize, and automate their financial operations. This includes things such as processing invoices, streamlining approvals, making and receiving payments, managing employee expenses, syncing with accounting systems, and managing cash.
The company generates about a quarter of its revenue from subscriptions. Prices are generally based on a per user per month basis. Its Accounts Payable and Receivable modules currently start at $45 a month each, or $79 together.
About 65% of BILL's revenue comes from usage-based transactional fees and interchange income. This includes things such e-payment/ACH processing fees, mailing invoices and checks, and credit card transaction fees. BILL also owns credit and expense management software firm Divvy. Divvy is free to use and it makes money by getting a cut of the credit card fees when merchants spend money using their associated corporate credit card.
The company also generates a little over 10% of its revenue from float. This is holding customers money funds in interest bearing accounts while it is waiting to clear.
Opportunities and Risks
With over 180,000 SMB customers on its core platform and 4.7 members in its network, BILL has quickly gained scaled. At the same time, this creates a powerful network effect and introduces more businesses to its offering. Despite its large number of customers, its penetration is still small, as the company estimates that there are over 30 million SMBs and sole proprietors in the U.S. and over 70 million globally. Most of these companies are still doing invoicing and payments via old-school methods such as excel and paper.
As such, the market for BILL's core product has a long runway in front of it. At the same time, its network should have a flywheel effect that creates more transactions and draws more companies into its offerings.
BILL has also grown through acquisitions, most notably with Invoice2go, Divvy, and most recently financial planning software firm Finmark. These acquisitions add customers into the Bill network. With Divvy and Finmark it can lead to cross-sell opportunities, but more so it looks like BILL could eventually integrate these two companies into its core platform to create a more comprehensive SMB spending management platform.
With Invoice2go, meanwhile, BILL is servicing even smaller customers than its core Bill.com SMB. Invoice2go had outsourced payment capabilities to a third-party, so this is nice opportunity for BILL to grow. Invoice2go has 225,000 users generating over $25 billion in accounts receivable volumes, so the opportunity isn't small.
At Wolfe conference last month, CFO John Rettig said:
Invoice2go , when we acquired the business, had about $25 billion in AR volume and very little payments monetization on that invoice value in part because they had outsourced the payment capabilities to a third party. So one of our first goals was to implement new payment capabilities with leveraging some of the build platform features that we have, and then drive adoption on existing payment flows as well as that invoice value at $25 billion. So I think we're making good progress. Pre-acquisition, they were in the order of magnitude of maybe 20 basis points of monetization. We're a little bit below 100 basis points today, but it's still a small volume. We're early in the penetration cycle, but we've made progress at proving out the thesis that we had around the opportunity to expand payment monetization. Now the journey around driving adoption and increasing the scale such that it becomes more material to BILL, that's the phase that we're in now."
BILL also grows as its SMB customers grow. The more buying and spending its customer do through its platform as they grow, the more revenue BILL generates. This can be seen in BILL's strong 131% dollar-based retention rate. Most of this growth has come from the transactions side of the business.
BILL is also increasing prices. It took its first price increase in two years last August when it announced a price hike in the direct channel. It is continuing to roll out a price increases this fiscal year that will impact both its direct and accounting channel customers.
Higher interest rates are also a benefit to the company, helping it generate substantially more float revenue. Float revenue jumped from $1 million in Q2 FY22 to $28.9 million in Q2 FY23. Fiscal Q3 and Q4 should also see huge year over year jumps due to higher interest rates.
Longer term, BILL has a nice opportunity to go after the international market. Invoice2go brought with its customers from over 150 countries, and BILL has cross-border payments. However, with a long runway in the U.S., that will continue to be the priority in the years ahead.
When looking at risks, BILL is not immune from any weakness in the economy. It greatly benefits from its customers' spend, so when SMBs pull back on their spending, it impacts BILL. In fact, one weak spot with its FQ3 guidance was that it called for flat year over year total payments volumes.
On its FQ2 earnings call , Rettig said:
I'd just add that it's been a bit of an evolution in the spending patterns that we've seen from small businesses, starting with some of the larger businesses mid last year to other segments focused on discretionary spend being lighter. And now we've seen some trends that suggest businesses of all sizes are taking a hard look at most all of their spending. As it relates to Bill versus Divvy, the Bill core customer base is slightly smaller in size and perhaps more sensitive to the economic conditions that are prevailing right now. The Divvy customer base is slightly larger and it's a newer customer base where the growth profile is obviously earlier -- at an earlier stage than Bill and obviously, much stronger growth. So we feel good about the visibility that we have and how we're helping SMBs to this environment. And in the near term, though, we have made some adjustments in the way we're operating to account for some of the uncertainties that SMBs are facing today."
SMBs also generally have fewer financial resources than enterprise customers, and thus are more susceptible to economic downturns. This could increase churn or lead to customer bankruptcies if the economy turned really bad.
Valuation
SaaS companies are generally valued based on a sales multiple given their high gross margins and the companies wanting to pump money back into sales and marketing to grow.
In this regard, BILL is valued at a P/S ratio of about 6.6x based on the FY2024 consensus for revenue of $1.25 billion. Based on the FY2025 revenue consensus of $1.56 billion, it trades at a P/S multiple of 5.3x.
Analysts are projecting the company will grow revenue 56% this fiscal year and 25% next few years are that.
Among the fastest-growing SaaS names, BILL is the cheapest. The fact that much of its revenue comes from transaction is likely the reason behind that.
Conclusion
While BILL might not be a full-fledged SaaS company due to the transactional nature of the bulk of its revenue, it is a very attractive business with a long runway ahead of it. I also like the direction is heading with its recent acquisitions, and think the company's solutions could be really interesting in a few years.
The stock trades at a very attractive multiple among high-growth SaaS names. It also has some of the best growth and customer payback periods out there. I'm a big fan on S&M efficiency with SaaS names and BILL has done a great job on this end.
The numbers in the table above are a bit skewed due the increase in float revenue, but its trailing 12-month payback period excluding float revenue would still be about 2 years, which is solid. However, it has been creeping up a bit from about a 1-year payback period earlier.
I see solid upside in the stock to $100, which would be about 8.5x P/S multiple of FY24 revenue.
For further details see:
BILL Holdings: Growth At An Attractive Valuation