2023-04-03 11:59:39 ET
Summary
- BILL Holdings, Inc.'s transaction business model is slowing down.
- The more that BILL Holdings' topline slows down, the more investors will be asking the question, when will Bill.com report a GAAP profit?
- BILL Holdings' shareholder base is starting to rotate out of this stock. That's not a good setup for existing shareholders.
Investment Thesis
BILL Holdings, Inc. ( BILL ), formerly Bill.com Holdings, Inc., provides payment solutions to small and medium businesses ("SMBs"). The business is extremely well set up for a thriving economy, as the bulk of its business model charges per transaction. More specifically, more than 60% of its revenues come from transactions.
The problem here is that the economy is no longer as strong as it was in the past two years. And just because BILL is down more than 70% from its prior highs, doesn't mean the stock is undervalued.
Revenue Growth Rates, a Tell Tale Sign
Let's perform the following exercise. Let's pretend that the revenue growth rates above are not for BILL. They are for company ABC. What do you see above?
You see a company that is in the process of reporting slowing growth rates. The problem with a company becoming post-growth is that the other investors looking at the company don't believe in its prospects.
And more specifically, the real problem is that new investors looking at the graphic above, aren't sufficiently enticed to deploy their hard-earned capital to buy stock in the company.
And if there are not enough ''new'' believers coming into the stock, you end up with a shareholder base rotating out of the stock and moving onto different investment opportunities. And that's a rough place to be in because the new shareholder base will require a large margin of safety before they get involved.
Let's take a step back.
What's Happening With BILL Holdings?
When the share price is going higher, nobody is asking tough questions about their investment. The share price is going happier and everyone is happy. And they tell their friends about the stock, and their friends start to buy the stock.
But when the share price starts to move down, all of a sudden, people start asking difficult questions about their stock. And that's when things start to get troublesome. At that juncture, things move from everything is going well to people asking difficult questions and wondering if the share price does indeed have enough margin of safety.
On top of that, BILL has a long history of under-promising and over-delivering.
SA Premium
As you can see above, BILL guides low and always comes out with strong topline beats.
Meaning that, even if the guidance for the next couple of quarters isn't that compelling, the guidance is something that BILL always beats, so shareholders aren't even worried about the guidance.
All that being said, at the crux of the matter is the business model. BILL's business model is 65% based on a usage-based transaction model.
BILL Q2 2023 Presentation
What that means in practice is that when the economy is strong, SMBs are thriving and transactions are flowing. But when a recession starts to emerge, SMBs are amongst the first to get hit. And they slow down their usage of BILL, since their own business is slowing down too.
And when BILL's revenues start to slow down, investors start to look further down the income statement.
Seeking BILL Holdings' Profitability Story
As touched on throughout, for a share price to go higher, you need believers. You need investors to believe that earnings are going to be higher next year than they are this year.
For that, it helps if the business is steadily growing its topline and if the business is already on the cusp of profitability.
In BILL's case, neither of these characteristics is taking hold. Its revenue growth rates are decelerating. And its bottom-line profitability leaves a lot to be desired.
I fully recognize that management touts its strong free cash flow line, but as you know, that's mostly made up of SBC added back. Let me put it this way, nearly 50% of the revenues that BILL generates go to support management's stock-based compensation. Ultimately, that's not a viable business model on the cusp of profitability.
The Bottom Line
The good news for investors is that BILL Holdings, Inc. has plenty of cash. With more than $2.5 billion of cash and equivalents, the business can continue to invest in stabilizing its operations.
The bad news is that in 2 years' time, BILL has $1.2 billion worth of convertibles that will need to be tackled. Even if BILL refinances a portion or all of its convertibles, I don't believe it will manage to refinance at 0% rates.
Unless BILL Holdings, Inc. starts to cut a path to profitability rather soon, the share price will remain under pressure from its existing shareholders rotating out.
For further details see:
BILL Holdings: Telltale Sign