Is BILL Stock a Buy After Today’s Bashing?
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“If you’re someone sitting on the sidelines, we don’t see any reason why you wouldn’t consider going long Bill Holdings (BILL).” That’s what we concluded this past April in a piece titled Bill: A Financial Process Automation Leader. At that time, BILL traded at a reasonable simple valuation ratio of seven. Following their latest earnings report, the stock has dropped 30% bringing BILL’s SVR to around 5 which happens to be right in line with our catalog average. (Our recent tech stock catalog update saw the average drop from 6.5 to 5 as growth stocks become less appealing in the face of ye olde macroeconomic headwinds.) Today, we want to make sure that BILL’s bad earnings report is an opportunity, not a trap.
Alerts on Price Movements
<Puts sales hat on.> One of the many perks for Nanalyze Premium annual subscribers is that they’ll receive alerts when stocks we love or like drop 15% or more in a single day. Sometimes when after-hours trading implies a stock will open significantly down, we have the luxury of burning the midnight oil and producing an article instead of an alert. More time to research gives us more confidence in what we communicate, and we’re always trying to answer one simple question. Is this dramatic downwards price action a sign of systemic problems creeping into the picture, or just a knee-jerk reaction from fickly Wall Street analysts whose short-term viewpoints mean very little in the bigger picture?
To answer that question, we’ll usually scrutinize any number of things from the below menu.
- Read the company’s press release
- Look at the accompanying deck
- Do a quick scope on Twitter for scuttlebutt
- Skim the SEC filing for any red flags
- Read the company’s earnings call transcript
The last bullet point is our secret weapon. Nobody has time to sit through the painful torture of a one-hour earnings call, but you can skim the transcript in about 10 minutes. What you’re hoping is that the analysts who follow the company have keyed in on whatever red flags might have surfaced and will ask questions accordingly. Sure, you’ll get the usual “amazing quarter guys” sycophants throwing softballs, but any analyst worth their salt will quickly wade through all the “our commitment to our customers is unwavering” cow excreta and drill into what matters. Prior to questions, the person running the call will usually try to provide preemptive explanations for whatever elephant is standing in the room. In this case, it’s BILL’s revenue guidance for this year.
[…] we started to see more intense macro pressure on our business related to spend late in the quarter, and that has continued through October. As a result of higher interest rates and tighter credit markets, capital and cash have become less affordable and available for SMBs. Some of our larger businesses have scaled back their spend while both customers and their suppliers became more selective with their payment choices. Business behaviors changed rapidly in this respect.
Credit: BILL
BILL Stock and Revenue Growth
Beating your guidance these days is an expectation, not a surprise. BILL’s Q1-2024 revenues were $305 million (2% more than higher end of guidance), but that’s where the good news stops. Guidance for the full year saw growth rates plummet to a “dismal” 14% on the lower end, something that’s par for the macroeconomic headwinds course.
The company’s explanations make sense on the tin. A recessionary environment leads to more cost control measures and that’s a consistent theme across the board with SaaS firms we cover. However, BILL has three major revenue streams which can be examined for more insights.
In the call, the CFO talks about how “subscription revenue growth was impacted by the restructuring of an agreement with a financial institution partner.” That’s likely referring to their canceled relationship with Intuit which was said to impact 12,000 customers (out of 470,000) and impact revenues by no more than 1%. As for transaction fees (66% of revenues), these will be tied directly to platform spending which – as we were told – is slowing as customers tighten their purse strings. That’s partially offset by the “float revenue” which is simply interest being collected on customer deposits. They’ll enjoy growth in this segment as long as interest rates keep rising.
What’s more concerning than the temporary blip in subscription revenue growth is that Intuit may now be competing with BILL, though competition is nothing new given there are loads of players in the B2B payments space and lots of opportunities to be captured. Where investors might have concerns is around comments like this.
In addition, larger suppliers in our network have started to increasingly choose lower-cost payment methods, sometimes at the expense of payment speed. We expect that this trend will continue as economic conditions influence businesses and this could have a negative impact on overall transaction monetization in the near term.
Credit: BILL
Provided those “lower cost payment methods” are taking place on the BILL platform, then that’s nothing to be too concerned about. Analysts on the earnings call questioned whether those lower cost methods would be the norm going forward, and BILL’s convoluted response didn’t provide much reassurance except to say they planned to combat the spending decline with more options.
Bits and Bobs
BILL’s dramatic price drop doesn’t seem merited in the face of temporary setbacks attributed to the recessionary environment businesses find themselves in. Spending declines at the broadest level are affecting payment volumes, while at BILL’s level, customers are choosing whatever options result in less spending. That’s reflected in the metrics as well. In April, we wrote that Bill had “a respectable net retention rate of 131%, beating the 2022 SaaS industry average of 114%”. That’s not quite the case anymore with Bill’s NRR falling to 111%. That’s understandable considering the lower spend on their platform, but it’s something to monitor closely going forward.
Increasing customers over time show the platform continues to gain momentum as a leader, and there’s nothing in the call that leads us to believe the company is now encountering some sudden systemic problem that spells disaster. Their language around how sudden these declines came about understandably concerned analysts who probed whether the guidance cut was sufficient. After reviewing the available collateral, we don’t see any major causes for concern for long-term investors who should expect B2B spending to come under pressure as cost-cutting measures continue to be implemented. The sharp drop in valuation means an opportunity to add shares at a discount relative to what shares have historically traded at.
Conclusion
BILL is a stock we have high convictions on despite not holding it. That’s because it was significantly overvalued with a simple valuation ratio of 90 back when we considered investing in the company. Today, you can get the same business for a valuation that’s about market average for disruptive tech stocks. As a leader in the B2B payments space, we’d expect BILL to offer above-average growth opportunities while navigating whatever headwinds come their way. The company’s focus on tightening up credit exposure, monitoring expenses, and immediately adjusting guidance means they’re anticipating tough times ahead and are planning accordingly.
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If, as you say, “they are anticipating tough times ahead”, why would I want to buy them now??
That’s entirely your call.
George had a very reasonable question – deserves your response. After all……..
All companies are having a difficult time going forward because of macroeconomic headwinds. Why would you want to buy them? Because investors want to buy quality companies at a discount.