Shares of BlackLine (BL -4.40%) popped almost 50% from their IPO price of $17 on their first day of trading on Oct. 28. The stock subsequently gave up some of those gains, but remains about 30% higher than its offering price as of this writing.
The automated accounting software company raised $146 million from the IPO, and plans to use those proceeds to pay off its debts. Let's take a closer look at BlackLine, what it does, and whether or not investors should pick up some shares.
What does BlackLine do?
BlackLine, which was founded 15 years ago, provides cloud services that automate accounting processes. Its Finance Controls and Automation platform reduces the need for human accountants and the potential for human error in data entry and calculations. The platform is currently used by over 1,500 companies in over 120 countries worldwide.
Prior to its IPO, its biggest shareholders were Silver Lake and Iconiq, which respectively owned 46.5% and 22.8% of the company. BlackLine's major clients include Coca-Cola, Under Armour, and Costco, and its platform integrates with enterprise software from Oracle (ORCL 0.36%), NetSuite, SAP (SAP -1.00%), and Workday.
How fast is BlackLine growing?
BlackLine's revenue rose 62% to $83.6 million last year, and grew another 48% annually in the first six months of 2016 to $55.6 million. However, BlackLine's net losses widened from $16.8 million in 2014 to $24.7 million in 2015, and they widened again from $10.8 million to $16.9 million between the first six months of 2015 and 2016.
Under the "Risk Factors" section of its S-1 filing, BlackLine admits that higher R&D expenses in scaling up and securing its platform, the need for expanding its sales teams, and international expansion efforts could all weigh down its bottom line growth.
CEO Therese Tucker didn't set a timeline for profitability, but declared that BlackLine could generate positive cash flows by next year. BlackLine's cash position fluctuates greatly from year to year, rising 73% to $25.7 million in 2014 and falling 41% to $15.2 million at the end of 2015. That position declined to $13.6 million by the end of June 2016.
In September, BlackLine agreed to acquire Runbook, a European provider of automated accounting software, for about $34 million. That deal will mainly be funded by debt, which BlackLine plans to extinguish with its IPO proceeds. The company already had $34.4 million in long-term debt on its books at the end of June this year, which doesn't include the debt from the Runbook deal. However, the $146 million it raised from the IPO should easily cover those debts and strengthen its cash position.
Who are BlackLine's rivals?
BlackLine's direct competitors in the automated accounting market include smaller start-ups like FloQast, Tagetik, and Hubble. These rivals aren't dangerous, however, since BlackLine has already established a strong presence among Fortune 500 companies.
The real threat to BlackLine comes from bigger cloud infrastructure players like Oracle and SAP. These IT giants have the resources to acquire, create, and build similar accounting automation solutions on top of their own cloud platforms.
SAP offers ICR (Intercompany Reconciliation), a first-party tool for the management of financial accounts. Oracle offers a similar tool called ARM (Account Reconciliation Manager). BlackLine's automation platform is compatible with these platforms, but there's no guarantee that these bigger companies won't start evolving their own bundled tools into direct competitors against BlackLine.
Should you buy BlackLine today?
BlackLine currently has a market cap of $1.1 billion. This gives it a price-to-sales ratio of 13. That's a pretty high figure compared to other high-growth tech companies. Cybersecurity firm Palo Alto Networks, which posted 49% sales growth last year, trades at 10 times sales. Cloud-based CRM (customer relationship management) company Veeva, which generated 31% growth last year, trades at 11 times sales.
Those comparisons indicate that BlackLine's upside potential could be limited by its valuations until its sales growth catches up. Its high valuation -- combined with slowing sales growth and non-existent profits this year -- could be an invitation for short sellers to swarm in. Its lockup expiration next April could also exacerbate that decline. Therefore, I'm keeping an eye on BlackLine for now, but I'm not in a hurry to invest in this hot new stock.