2023-06-07 04:54:40 ET
Summary
- BILL's stock has jumped over 50% since my write-up in mid-April.
- Strong FQ3 results were a catalyst, showing the resiliency of the business.
- Despite jump in stock price, BILL's valuation remains reasonable given its growth, making it a continued "Buy" for investors.
Back in mid-April, I wrote a bullish article on BILL Holdings ( BILL ), saying that it was a growth name at an attractive valuation. With the stock up over 50% in less than 2 months since that article, let’s take a look and see if BILL stock is worth holding onto or it is time to lock-in some gains.
Company Profile
As a quick reminder, BILL is a SaaS company that helps SMBs digitize and automate their financial operations. It helps its customers do such things as process invoices, streamline approvals, and make and receive payments, among other functions.
The bulk of BILL’s revenue comes from usage-based transactional fees and interchange income for things like e-payment/ACH processing fees, credit card transaction fees, and mailing invoices and checks. About a quarter of its revenue comes from subscriptions, which are priced on a per user per month basis, and with higher interest rates, it saw about 10% of its revenue come from float, as it holds customers money and collects interest on it until it is paid out.
Post Earnings Surge
BILL’s stock had taken a big hit with its fiscal Q2 earnings report about a month and a half before I wrote about. While the quarter itself was very strong, a weaker-than-expected fiscal Q3 guidance took a toll on the stock.
At the time, the company forecast revenue of between $245-248 million versus a then analyst consensus of $250.7 million. A couple of sell-side analyst quickly downgraded the stock , and many lowered their target prices.
When BILL turned around and reported its actual fiscal Q3 results, revenue grew 63% to $272.6 million. That was much higher than the $247.2 million consensus, and also much higher than the $250.7 million consensus when it issued weak guidance back in February.
As I pointed out in my original write-up, BILL’s exposure to SMB customers was considered one of the biggest risk when looking at its business. The company once again on its call reiterated that SMB customers were decreasing their spending in response to the macro-environment. However, it noted that the number of transactions were similar year over year, but the expenditure per transaction were declining. In the end, its TPV (total payment volume) processed was $64.7 billion, which was well above its expectations that were based on late December trends.
On its FQ3 call , CFO John Rettig gave his view on the state of his SMB customers, saying:
“I'd like to share our view on how we see the macro environment impacting SMBs and our business. While we've seen initial signs of spend trends beginning to stabilize, we anticipate that the challenging macro environment and tightening credit conditions in the near term will translate into customers continuing to reduce spend from the elevated levels of the pandemic years. For the BILL stand-alone platform, we expect Q4 TPV to be roughly flat to Q3 and down slightly on a per customer basis quarter-over-quarter. While the cyclical headwinds will likely persist in the near term, we are optimistic about the strong secular trends driving digital transformation and we're confident in our ability to achieve our long-term aspiration to serve millions of businesses.“
BILL being conservative with its FQ3 guidance was a dual-edged sword. If you owned the stock at the beginning of the year ahead of its FQ2 report, the company not being able to remotely forecast its FQ3 revenue stung. If you took advantage of the price dip to buy or add shares, it turned out well. However, it does show that the business doesn’t quite have the predictability of a pure SaaS business given its more transactional nature.
Adding new customers and cross-selling were two big opportunities I identified in my initial write-up. On the new customer front, the company added 11,500 new BILL stand-alone customers, a quarterly record. Overall, it end the quarter with 197,900 BILL standalone customers, up 35% year over year. It also added 2,400 Divvy customer to end the quarter with 27,100 spending businesses customers. Overall, it ended fiscal Q3 with 455,300 customers. And the more customers that it get on its system, the more potential clients it draws, creating a nice flywheel effect.
BILL did note that it will see fewer net customer adds in Q4 as Bank of America ( BAC ) sunsets the BILL-powered legacy ACH and check BILL pay solution used by their commercial customer segment. It has been transitioning many larger customers over to its standalone product, and BAC will still promote BILL with its small business segment.
Float revenue, a tailwind I discussed in my last write-up, continues to go higher. It was $33.1 million in FQ3 and is projected to be $32 million in FQ4. The guidance could prove to be low, and interest rates remain elevated. A year ago, float revenue was only $1.4 million.
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 9.1x based on the FY2024 consensus for revenue of $1.29 billion. Based on the FY2025 revenue consensus of $1.62 billion, it trades at a P/S multiple of 7.3x.
Analysts are projecting the company will grow revenue 62% this fiscal year and mid-20% next few years after that.
Among the fastest-growing SaaS names, BILL remains the cheapest. The fact that much of its revenue comes from transaction is likely the reason behind that.
Conclusion
While BILL is not a full-fledged SaaS company due to the transactional nature of the bulk of its revenue, the business showed its strength in FQ3, even more than its own management forecast. The company still has a nice runway to add customers and to grow with its clients. The product is really becoming ingrained with SMBs and creating a flywheel effect as more and more customers join the platform.
The stock’s valuation has increased given the quick 50% jump in the stock price, but it still remains reasonable given the growth that BILL is putting up.
For investors that added the stock before the price surge, I’d continue to hold on. For now, I will continue to keep my “Buy” rating.
For further details see:
BILL Holdings: Stock Remains A 'Buy' Even After 50% Surge