2023-05-07 11:51:19 ET
Summary
- Bill.com is a leading player in automating accounts payable for SMBs, replacing manual processes.
- The SMB accounts payable automation market is primed for disruption, offering growth opportunities for Bill.com.
- The stock has declined approximately 40% over the past year, presenting an attractive entry point for growth investors.
- I have an end-of-year price target of $116 on the stock derived from an assumed forward EV/Sales multiple of 10x and a consensus 2024 revenue estimate of $1.25 billion.
Thesis
BILL Holdings, Inc. ( BILL ) stands out as a leading player in the automation of accounts payable for small and medium-sized businesses (SMBs), replacing outdated manual methods such as paper check processing. SMBs can be challenging to target, but Bill's early entry into the market and strong product and distribution capabilities have positioned it for significant market share, similar to other successful companies in various service sectors. I believe that even in times of high inflation, the significant SMB accounts payable automation market is ready for disruption, and BILL has the potential to capture a substantial market share. Hence, I keep an end-of-year price target of $116 on the stock derived from an assumed forward EV/Sales multiple of 10x and a consensus 2024 revenue estimate of $1.25 billion.
Post Q3 Outlook
BILL's FYQ3 print was solid , and call disclosure pointed to constructive trends. The company reported non-GAAP EPS of $0.50, which compared to the Street estimates of $0.24. I believe earnings forecasts for Bill appear conservative given its significant operating-expense leverage and the company's cost savings supporting prospects for a better-than-expected bottom line.
Going forward, I believe Bill's profitability is set to take center stage as the company's channel investments in accounting firms, software integrations and financial institution partners drive meaningful earnings leverage in the absence of transaction-revenue growth. For fiscal 2023 and 2024, I expect some pressure on sales to remain. That's due to a deceleration in business-to-business (B22B) payment volume and a slower gain in monetization rates as business sentiment sours among small and medium businesses, Bill's primary customers.
Bill's Competitive Position
To be considered a strong contender in the modern accounts payable ((AP)) industry, an AP provider must possess several key traits. These include automation and integration to streamline outdated processes, improved accuracy compared to manual methods, transparency, and a strong focus on security in the digital era.
I believe BILL incorporates elements that positively influence all these factors, positioning it as a competitive player in the market. One of its notable strengths is being purpose-built for small and medium-sized businesses. With a cloud-based infrastructure and a strong emphasis on mobile capabilities, BILL enables SMBs to conduct business anytime and anywhere. Additionally, it offers value-added services that are typically challenging for SMBs to access, providing them with a significant advantage.
BILL's distribution strategy is diverse, utilizing both direct web-based lead generation and a partner-centric approach. While the direct web-based approach appeals to SMBs, the partner-centric strategy is particularly valuable for reaching out to this segment. By partnering with accounting firms, financial institution partners and integrating with accounting software, BILL can effectively connect with SMBs, similar to the approach employed by Paychex, Inc. ( PAYX ), another prominent SMB-focused outsourcer.
Another significant aspect of BILL's offering is its robust data assets, supported by a two-sided network. Through its extensive network of over 157,000 organic customers and more than four million suppliers, BILL has the ability to observe both sides of the B2B transaction. By leveraging artificial intelligence and machine learning technologies, BILL generates valuable insights from this vast data pool. This two-sided network creates a virtuous cycle, allowing BILL to continually enhance customer satisfaction, provide intelligent insights, build trust and safety, and drive network growth. Moreover, having access to both sides of the B2B transaction enables BILL to efficiently add suppliers to its network and potentially increase the volume of lucrative and efficient in-network virtual card transactions.
Furthermore, BILL employs AI-driven risk management, utilizing its network data to train its risk engine. With millions of B2B transactions, including ACH, check, card, and wire transactions, BILL's AI capabilities continuously strengthen its risk engine, ensuring the security of customer funds and account details.
Overall, BILL's purpose-built nature for SMBs, diverse distribution channels, robust data assets, and AI-driven risk management capabilities make it a compelling and competitive service provider in the financial industry.
Solid GRM & Growth Strategy
BILL adopts a dual approach to its go-to-market strategy, utilizing both direct and indirect sales channels. The company employs direct sales methods such as online digital marketing, referral programs, and inside sales. Furthermore, BILL makes indirect sales by forming partnerships with accounting firms, financial institutions, and accounting software companies. As of the close of 2021, BILL had successfully forged partnerships with 85 of the leading 100 accounting firms and six of the top ten financial institutions in the United States.
The management has identified the accounting channel as a particularly effective driver of acquiring new customers. As an incentive, BILL offers accounting firm partners a $250 referral fee for successfully referring their clients to subscribe to Bill.com. Furthermore, there is a $10 incentive for trial customers referred through this channel. These referred customers also receive a 10% discount on their subscriptions, adding value to the partnership arrangement.
B2B Commerce is Primed for Automation
Although there have been advancements in software solutions and the availability of virtual cards in B2B commerce, the digitization of this space still lags behind consumer commerce. The majority of businesses continue to rely on outdated paper-based processes, with approximately 40% of U.S. B2B transactions being paid via paper checks. The reason for this lag can be attributed to the inherent friction between buyers (who use AP solutions) and suppliers (who accept payments and sometimes use AR software). For many companies that haven't faced significant payment challenges, automating accounts payable may not be a high-priority issue. However, when there is a receptive audience of buyers, selling automated and virtualized payment solutions such as virtual cards and enhanced ACH can be relatively straightforward due to the clear benefits for payers, such as card spend rebates.
On the other hand, the benefits for suppliers on the accounts receivable side are less apparent. While suppliers benefit from digitized payments that eliminate the hassles associated with paper checks, the cost of accepting virtual cards can be prohibitive. Larger suppliers with more bargaining power may opt for basic ACH payments, which incur lower costs (single-digit basis points) compared to the over 200 basis points for virtual card transactions. Smaller and less sophisticated suppliers may be intimidated by interchange costs, and the decision to automate accounts receivable may result in job losses as managing invoicing and receivables requires significantly less labor.
Several factors have contributed to the slower modernization of the B2B space, and there is no single driving force behind it. However, advancements in technology, improved interoperability, and the presence of open networks like Billtrust BPN and MasterCard Track are creating an inflection point that could accelerate the digitization of B2B commerce. These developments offer better opportunities for automation compared to previous attempts made in prior decades.
Valuation
I consider BILL's primary comp group to be the AP automation peer group, consisting of AvidXchange Holdings, Inc. ( AVDX ) and Coupa Software Incorporated ( COUP ), recognizing both players don't compete directly in BILL's SMB niche and grow slower both organically and inclusive of acquisitions. I also identified four secondary comp groups that I believe are relevant - the AR automation group, the scale B2B corporate payment processors, high-growth FinTech/SaaS, and HCM SaaS/Payroll. Growth rates vary, so I focus on growth-adjusted revenue multiples for comparability's sake.
BILL is recognized as the top performer in terms of growth among the companies covered. While organic growth is projected to decelerate from its recent levels, an anticipated organic growth rate of over 50% in FY23E still positions BILL among the leading players in the FinTech/SaaS space. In comparison to other fast-growing companies. As a true growth stock, BILL's revenue compound annual growth rate places it in a small group of tech stocks with mid-term growth ranging from 40% to 50%, such as Datadog, Inc. ( DDOG ), Cloudflare, Inc. ( NET ), and Snowflake Inc. ( SNOW ), which command premium valuations with forward revenue multiples compared to BILL.
I have an end-of-year price target of $116 on the stock derived from an assumed forward EV/Sales multiple of 10x and a consensus 2024 revenue estimate of $1.25 billion. Currently, BILL's stock is trading at a significant discount of approximately 40% from its price one year ago, indicating that the market is undervaluing the company's leadership position in an underserved market with substantial growth potential. Furthermore, the increased relevance of BILL's automation products in a rising cost environment adds to its growth prospects.
Risks
Slowing Business Spending
BILL is expecting the macro environment to be increasingly challenging for SMBs in the near term, which could result in lower year-over-year TPV growth in the coming quarters. However, BILL is experiencing strong customer engagement with high retention rates and demand for its cost management tools. Subscription revenue has been boosted by customers from the FI channel, but many customers are still at revenue minimums. Cross-selling legacy BILL services across I2Go and Divvy's customer base is an important part of the growth strategy, but it is still in the early stages and has not yet significantly impacted growth. Therefore, BILL must continue to focus on selling its platform to new customers and driving efficiency to ensure sustained growth, as any slowdown could negatively impact the stock price.
Intensifying Competitive Environment
Bill.com operates on the AP side of the B2B equation, which I believe has more direct competition than the AR side (where BILL's presence is less significant). Competitors in the AP space include well-funded platforms for AP automation, payment processors (which can both partner and compete), traditional banks and issuers, and other modern payment players looking to expand into B2B. Additionally, SMB software is easier to replicate, with fewer integrations to address compared to the mid-market and with fewer procurement-specific needs compared to enterprise. New entrants in the market can pose a challenge for BILL and eat away market share, which would affect the growth prospects of the company.
Final Thoughts
BILL has developed a platform that addresses the long-standing issue faced by small and medium-sized businesses when it comes to bill payment. As the leader in this category, the company has experienced rapid growth in the past few years and is well-positioned to continue its growth trajectory in the medium term. BILL is the fastest-growing company in the sector, and hence I believe the stock should be trading at a higher multiple. The stock is down about 40% over the past one year, which I believe provides a good entry point for a growth investor.
For further details see:
BILL Holdings: Leading The Market In SMB AP Automation