A year ago, Bill.com’s stock ( BILL ) stood at over $220, today it trades at less than half that, reflecting the popping of the bubble and a shift in investor sentiment toward safer stocks amid recession fears. To be sure, the company’s competitive positioning and strong performance have proven that demand for its products is not going anywhere. But on balance, BILL’s stock is still trading at a hefty premium, which makes it a Hold for Que Capital.
BILL’s 2Q financials were strong — including revenue of $260 million, up 66% year over year, and gross margin improvement from 78% to 81.7%. In addition, BILL reported $53.45 million in free cash flow, indicating good financial health for a company that only recently turned FCF positive. Its total number of clients increased by 35% and client retention rates by 59% year over year.
Despite strongly beating estimates, the stock fell in the second quarter by over 29%. Because Bill.com strongly relies on the health of the small and medium-sized business (SMB) market, the effects of an unsteady economy have already started to show on its total payment volume, which saw 13% YoY growth but is decelerating. As a result, analysts have downgraded the stock, as many expect these results would not be sustainable amid a recession.
Tailwinds
An appealing product in a large market: BILL provides cloud-based automated financial payments and invoicing tools that significantly streamline paper-based processes — e.g., expense management, payables and receivables — that HR and finance departments must deal with. By automating the process with a service such as Bill.com, not only are companies able to reduce costly aspects of their operation, but they can also improve accuracy. Internal Bill.com case studies have shown companies saving more than $200,000 a year by using its service.
In the U.S. alone, management estimates its total addressable market (TAM) to be around $9 billion. There are over 30 million SMBs, and Bill.com has only captured 400,000 of them.
To be sure, if a slowing economy causes a significant proportion of SMBs to shut down, BILL could see a sizable decline in its business. Nonetheless, BILL seems like a strong candidate to endure the recession as SMBs try to be more efficient.
Extensive partnerships: BILL has extensive partnerships with financial and accounting firms. In accounting, its partners number over 6,000, with big names such as KPMG and PwC in the mix — not to mention CPA.com, the largest accounting professional website in the U.S. In finance, BILL is partnered with the top six financial institutions in the country, including names like American Express and Wells Fargo. The fact that so many SMBs already have relationships with these institutions gives BILL an onboarding and integration edge over its competitors.
Valuation
We performed a discounted cash flow analysis assuming an 8% terminal growth rate and a 13.5% discount rate, which are very reasonable inputs. To project cash flow, we used analyst estimates which were the equivalent of a 64% 5-year free cash flow growth rate. All in all, we thought these estimates were very reasonable and even slightly optimistic. Still, it yielded a price target of $107.37, which is only 13.71% above the current price.
With this in mind, we don’t believe that Bill.com’s valuation has a sufficient margin of safety for us to confidently recommend a Buy. Instead, we suggest investors place it on their watchlists and monitor it for better buying opportunities. Although we can’t be confident about how badly a recession would affect the SMB market, we’re sure that this year will be volatile. Any negative sentiment could easily send the share price of a SaaS company like Bill.com down again, and generate a much safer and lucrative point of entry.
BILL is a strong company poised for continued growth in the SMB payment processing market. Though recession fears have clearly taken a toll on the company, its fundamentals remain strong, and it is positioned well to ride out a difficult environment. But at its current valuation, investors would pay a premium in a volatile market that could see better buying opportunities later on. Que Capital likes the company, but not the stock.
