Bill.com Stock: Further Losses to Follow (NYSE: BILL)

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Bill.com headquarters building outside.

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Needless to say, technology stocks have been incredibly volatile over the past few months, and little more so than Bill.com (BILL). This high-flying Wall Street favorite, a software company that helps automate accounts payable and debtors primarily for small and medium-sized businesses, saw a steeper than 50% correction compared to highs near $ 350 that carved last November. Yet, as usual, Bill.com recently returned with a large earnings report for the second quarter, restoring some confidence in the stock and consequently raising shares by ~ 30%.

The question for investors now is: with Bill.com still sitting at ~ 35% below its all-time highs, is this a good time to dive in?

Graph
Data by YCharts

With the combination of a slightly lower valuation as well as strong fiscal Q2 results, I swing slightly more favorably towards Bill.com than late last year. Yet the stock has a massive valuation – one I can not overlook, especially in 2022’s volatile, valuation-sensitive market.

The earnings season was indeed very volatile in the technology sector. Bill.com’s 30% rise came with Meta (FB)’s 20% drop (the biggest loss in market capitalization in dollar terms by any company, ever) and Snap’s (NYSE: SNAP) ~ 50% setback. Yet the crux of the message here is: Bill.com has already been praised for perfection, and expectations are incredibly high.

We must also take into account the fact that Bill.com’s unrealistic growth rates are currently being saturated by M&A, most recently through the acquisition of Divvy and Invoice2go. As I wrote in my previous article on Bill.com, the company’s growing debt load, and the fact that Bill.com is still burning cash, means that it will not have infinite firepower to continue to acquire companies to raise its growth rates. does not promote.

Granted, ~ 85% year-on-year organic revenue growth – which is what Bill.com reported this quarter – is still enviable. Yet at the same time, it is well embedded in the company’s share price. At current share prices close to $ 224, Bill.com has a market capitalization of $ 22.96 billion. After offsetting the $ 2.78 billion in cash and $ 1.69 billion in debt on Bill.com’s most recent balance sheet, the company’s resulting enterprise value is $ 21.86 billion.

For the next fY23 fiscal year, meanwhile (which for Bill.com is the year ending June 2023), Wall Street analysts have a $ 742.2 million consensus revenue target for the company (data from Yahoo Finance). This puts Bill.com’s valuation multiplier on astonishing 29.5x EV / FY23 income – of the highest in the software sector. It makes no sense to me that a company like Bill.com trades at a richer multiple of revenue than the S&P 500 trades at a multiple of earnings, when a good portion of its current revenue growth is M&A-driven and will be expected to fall below 40% by next year, and when it has also barely scratched the break-even surface.

In short – Bill.com remains quite an unwise investment, even after the recent drop in peaks. In my opinion, the stock is going through a volatility phase – it will shoot up and down, and traders can definitely make money on the swing. Over the medium term (9-12 months), however, I see that Bill.com has a lot more to lose. I would be more interested in grabbing this stock if it reaches an 18x EV / FY23 revenue multiple (which is a price target of $ 141), but I do not touch the stock somewhere higher than that.

Q2 download

That said, we will not reject the quality of Bill.com’s recent earnings – my thesis is just that Bill.com has become a very expensive but very high performing company that is now common in the technology sector and the biggest targets in the recent correction.

Look at Bill.com’s Q2 results in the chart below:

Bill.com Q2 results

Bill.com Q2 results (Bill.com Q2 earnings exemption)

Growth was, of course, the highlight. Bill.com grew its revenue at a 190% y / y rate to $ 156.5 million in the quarter, beating Wall Street’s expectations of $ 131.1 million (+ 143% y / y) by a massive margin has reduced. Of course, the big driver of this growth (and the cause of unpredictability) is Bill.com’s recent acquisitions (Divvy in Q4 and Invoice2go in Q1). The company reported that growth on an organic basis was 85% year-on-year.

Other measures also came above expectations. Total payment volumes, or the total dollar value of transactions managed through Bill.com, rose 62% year-on-year to $ 56.4 billion, more than Wall Street’s expectations of $ 50.3 billion. Note that Divvy’s share of $ 1.9 billion in credit card spending was within this total, and that Divvy itself grew by 145% year-on-year.

Note that the company has continuously consolidated its internal operations through its core business and its acquisitions, and has unbundled its silos. The company has announced that the former Divvy CEO has now switched to a Chief Revenue Officer role, overseeing sales for the entire company.

Here are some helpful anecdotal insights into business trends from Chief Financial Officer John Rettig’s prepared remarks on the Q2 earnings call:

Browse for an update on our key stats. Given our recent acquisitions, we provide additional insights on organic statistics for Bill.com, Divvy and Invoice2go. Customer acquisition during Q2 was strong in Bill.com. We ended the fiscal second quarter with 135,000 Bill.com organic customers, including 8,100 net new customers in the quarter, driven by strong customer acceptance across all our channels. We also had 15,500 outbound businesses using Divvy and 223,000 subscribers using Invoice2go’s AR solution by the end of Q2.

The slight decrease in net new customers added to Divvy and Invoice2go as expected, as we applied Bill.com’s more robust underwriting and on-board criteria to their new customer registration flow. We believe that this application of our own risk logic will yield higher value clients in the future. […]

Organic TPV performed significantly better than our expectations and showed strong seasonal trends similar to the trends observed in the December 2020 quarter. Our organic TPV growth in recent quarters has been driven by the involvement of our customers and expansion and share of wallet given more payment choices and the impact of a slightly larger average customer.

In honor of Bill.com, the quarter’s successes were marked by strong profitability as well as by above-expected growth. Bill.com achieved a gross margin of 85.3% on an adjusted basis, which is about nine points above FY21 pro forma gross margins of 76.6%. The company notes that this quarter was a bit of a coincidence, and expects margins for the rest of the year to be closer to 80-81%. That said, it has made sustained optimizations in its foreign exchange provider network that has contributed to margin growth.

Pro forma operating income also took a positive turn. The company generated a 2.2% pro forma operating margin, 520bps better than -3.0% in the year last quarter. We note that this is unusual for a company that has just adopted two initial acquisitions – usually acquisitions tend to pull a downward pull on margins in the early quarters of post-integration.

Key takeaways

I can not justify investing in a stock trade at ~ 30x FY23 income when the market is in correction mode. Despite the high growth that Bill.com is delivering, and the fact that it achieved a break-even point on a pro forma basis in its most recent quarter, I think the stock has already been praised for perfection. Stay away from here.



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