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Here's Why the Market Cheered Affirm and Bill.com

By Matthew Frankel, CFP® – Updated Sep 8, 2021 at 10:46AM

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These two companies are outperforming for different reasons.

In this week's installment of Industry Focus, host Jason Moser and Fool.com contributor Matt Frankel, CFP, discuss why Bill.com's (BILL -0.81%) earnings sent the already high-flying stock soaring. Plus, Affirm (AFRM 1.83%) wins the buy-now-pay-later lottery with a new partnership with Amazon.com (AMZN -1.63%). We'll break down the key takeaways from these stories and much more!

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript will follow the video soon.

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This video was recorded on Aug. 30, 2021.

Jason Moser: It's Monday, August 30th. I'm your host, Jason Moser on this week's financial show, we'll take a closer look at Bill.com's most recent earnings report. Affirm opens itself up to what could be a very meaningful market opportunity, and we've got a couple of stocks we're watching this week as earnings season wraps up. Joining me as always, this week it's certified financial planner, Mr. Matt Frankel. Matt, happy college football season.

Matt Frankel: That's a good way to look at what's going on this week. 

Moser: Guess it's a glass half full, right?

Frankel: We talked all last week about how some companies are bad at spinning stuff, and others were good, and you just spurn this week really well.

Moser: Well, I'm trying to get things kicked off on the right foot here man. Matt, we were following this story late last week and I tell you it was a banner day for Bill.com shareholders. I feel very fortunate to be able to include myself in that group, and I got a lot of very positive comments throughout the day on Twitter as well. Because Bill.com reported a strong quarter, the market reaction to that report was, let's just say enthusiastic in the stock. Shares finished up around 30% for the day. Going through these results, there are a lot of great parts to this story. To me, at least, it seems like it really all boils down to the guidance. It sounds like they've got one heck of a year lined up here.

Frankel: Well, it's been a banner year for Bill.com shareholders. You know this better than anybody, the stock’s up 180% in one year including this move.

Moser: Yes.

Frankel: It's not hard to see why. Their businesses are really catching on, and they are still in the early stages which is the key. I've seen tweets to the effect of why is Bill.com so highly valued, there are stocks with higher growth rates out there. To be fair it is, it's not a cheap stock by any means. Revenue was up a little over 50% year-over-year in their fiscal year. This was their fourth fiscal quarter, by the way. In the fourth quarter it was up 86% so it's accelerating, which is nice. Customer counts was up 24%. Nice but not the stellar growth rates you see from some of these tech companies. The thing is that they have not really captured their addressable market opportunity. They're trailing 12 month revenue was a little under a quarter of $1 billion, $238 million to be exact. Their domestic market opportunity just in the U.S. between the 6 million small and medium-sized businesses, is a $12 billion market, internationally it's a $40 billion market. They are at less than 1% of that right now, and I think that's what's the most exciting thing. Not only is their growth rate accelerating, but they're accelerating into this huge market, which I guess is one of the reasons you own shares.

Moser: Well, yeah, that is one of the reasons why I own shares. To your point on the valuation, because I think this is something Chris Hill and I and Emily were talking about last week on Motley Fool Money, and I am not going to sit there, and say, "Wow, this just looks like an ideal entry point for this business." It's difficult to make that argument, and the reason I say that the stock is valued at 130 times gross profit. It is still working towards that path to profitability so to speak. We are judging this company based on price to sales, price to gross profit, any which way you cut it, this is an expensive looking stock. Now, to be fair, when we were talking about this company along with Lemonade, I believe it was you, and I was talking on the show several months back about the stocks that we were getting ready to buy. You were talking about Lemonade, and I was talking about Bill.com. Even at that time, you can make the error in the stock look terribly overvalued even then. But I think to your point, it is that market opportunity, it's a massive one. 

I think that also, when you look at this business, there are network effects at play here that probably some folks maybe just don't really think of. I think that when you look at the customer base that they have, it's not just the customer base, but it's all of the other parties that are participating in that network. You look at the end of the quarter, they have over 3.2 million network members. That was up 28% from a year ago. That is resulting in those robust numbers you're talking about. I think growing in pay growth and payment transaction there's growth in total payment volume. All of those key performance indicators continue to tell a story of a business that it is just capitalizing. I guess that makes me wonder where do we go from here, we're seeing some acquisitions aren't we? They're making a couple of acquisitions along the way to maybe expand that market opportunity.

Frankel: Yeah, and that's a big part of the thesis. I'm really glad you brought that up. I saw on their quarter, they had a 124% net dollar retention rate. Meaning their current customers spend more and more over time. It's not just at 21% customer count growth, their customers are spending more, and it's because they are finding more value in all of the services that Bill.com offers. That's just going to grow over time too, and this is where I think of Lemonade, I love that comparison. Lemonade's numbers look terrible if you just look at it on a valuation basis compared to where they are right now. Even including some of their growth, it looks very overvalued for an insurance company especially. But you look at some of the adjacent products and services they can offer, and how they're going to go into auto insurance, which isn't reflected in their results at all at this point. Just a Bill.com, they mentioned one statistic. You have any idea what the business-to-business payment volume around the world is right now?

Moser: I don't but I have a feeling you're getting ready to tell me.

Frankel: I am, good intuition there. [laughs] It's $25 trillion.

Moser: Wow.

Frankel: A lot of companies don't make anything from, and of the process of getting money from a business to a business is clunky in a lot of cases.

Moser: Yeah, it is.

Frankel: How many invoices end up into someone's email, but they have to wait till that person opens their email, and then they have to wait till that person's payroll department or their accounts payable department gets a check in the mail. It's just a clunky process and a lot of room for improvement, and that's a huge, huge opportunity to really capture some of that. That's really where Bill.com adds value, and it's all these adjacent value adding products and services they can bring to the table.

Moser: Yeah. You heard that the acquisition of Divvy, which that was at $2.5 billion deal. They closed on that acquisition. Divvy ultimately helping companies focus on business spending management. I've always compared that to another company in this space, Cooper Software, which if you like Cooper, then I think you'll understand at least the potential there with that Divvy acquisition and why Bill.com made that move. Then in July they also announced that they will be acquiring another little company called Invoice2go, which is a mobile-first accounts receivable solution, and it's used by more than 225,000 small businesses around the country. Then that's about smaller deals, 600 and some odd million-dollar acquisition there. But when you put those two together, Bill.com is guiding for 100% revenue growth this coming year. Now that's not going to be fully organic, and part of that is these acquisitions. I guess question I have for you, generally speaking as an investor, how you view companies that are using the strategy of growth via acquisition? Clearly, Bill.com is growing organically, that's not really an issue. It is making some acquisitions along the way, but it doesn't seem like those are really acquisitions meant to shore up weaknesses in the business. It seems like these are acquisitions meant to expand the market opportunity. How do you view businesses that make acquisitions in order to keep that growth accelerating?

Frankel: One recent example I know is Square, they're acquiring Afterpay, and it's not to shore up their existing business. They're not in the buy now, pay later business. [laughs] It's to provide an adjacent service to their ecosystem of what? Forty million users in the Cash App.

Moser: Yeah.

Frankel: I think of it in that context. This is how you're going to keep that net dollar retention rate at 120% or higher is by acquiring businesses that add on other things to your business. This is what's going to fuel Square's growth. They're not buying it just so they can add Afterpay's customers to their client base. They're adding it so their existing 40 million customers use what Afterpay has to offer, and that's where Bill.com comes in. You mentioned 3.2 million people in their network, so every time they add one of these incremental businesses, it does something different. That's something that could eventually be applied to their entire customer base and generate growth in that way. We mentioned it, I think Square's Afterpay, the price they're paying $29 billion is a lot, but I could be wrong if that adds that much value to their existing business.

Moser: That's just it, that remains to be seen, of course. I think We had talked about that Square deal before, and I think there was probably a time component there that played into that offer. But generally speaking, to your point, that cannot be overstated the value in that network when you make these acquisitions and you can plug those ancillary services and those value-added propositions to that massive network. We've seen it in social networking, for example. Obviously, Facebook being the shining example. I would even look to a company like PayPal as having done the same sorts of things. It just really goes to show if you have that growing network of users, the acquisitions that are not meant to necessarily shore up a weakness or something that you're doing poorly, but rather opening up additional market opportunities. It requires a little bit of patience still, it requires a little bit of a leap of faith. But I think you can look at those types of companies that are making those acquisitions, I think you can look at them a little bit differently. I understand folks Who don't like businesses that grow via acquisition, but those are not all created equal.

Frankel: Yeah, for sure. At some point you really have to, don't you?

Moser: Yeah. Well, at some point, yeah. I think you're probably right.

Frankel: There's only so much you can build out in existing line of business, there's a finite market opportunity everywhere. Part of growth into a giant market opportunity like Bill.com has is to show what value you add. The more little bolt-on acquisitions they can do, the more value they bring to the table, the more people that are going to sign up for their platform, and the more they're going to spend on the platform. It's to keep the cycle of growth going. You could assume that people Who just wanted to simplify their bill payments already used Bill.com or one of their rivals. The people Who want to use that, they want to use a bunch of their adjacent services, expense management services, cross-border transfer services, things like that. Every time they add a service, they become more valuable to another subset of those six million small businesses. Over time, this could get really huge and create a snowball-like ecosystem. They could be to small businesses what Square is small businesses in the payment processing space.

Moser: Matt, before We jump into our next story on a firm, We have a little bit of breaking news here as We're recording. We won't dig too much into this, but it is something I'd like to at least get your thoughts on, because I think it goes back to what We were just talking about here and the value of bringing these new services to these big networks of users. I'm seeing a headline here, PayPal is exploring a stock trading platform for its US customers, reading this on CNBC on their app right now. I can't say I'm terribly surprised by this, maybe I'm a little surprised that it's not something they pursued earlier. We've seen Square over the last several quarters talk about the growth that they're seeing in Cash App users doubling in the market. Cash App users that own a stock or purchased a stock. It looks like PayPal is looking at possibly getting into something like this as well, leading in service here with its initially being referred to as invest at PayPal. Clearly, something that's right up our alley. What do you think about those plans? Is it something that makes sense for PayPal, do you think?

Frankel: Well, my first thought was the exact same as yours, why did it take them so long to do this?

Moser: [laughs] They've been focused on other things, I think.

Frankel: Well, sure. But my other adjacent thought to that is, are they late to the party? Has everyone else already scooped up that? Stock trading exploded in the middle of 2020.

Moser: It did.

Frankel: How many traders came on the market? Robinhood blew up, SoFi launched its platform, Square launched its platform. All brokerage went to zero commissions a couple of years ago, and that brought a lot of people off the vault. Who's interested in trading stocks doesn't already have a brokerage they go to? I worry if there might be a little bit late. I would've preferred to see them do that through acquisition is my initial thought, like how Square's now trying to build it buy now, pay later platform, because they're late to the party. PayPal already built theirs, Affirm and Afterpay are already out there, so they went and acquired someone Who already existed to make up time for being late to the party. PayPal is late to this party, I think. I think they have an uphill battle ahead, their advantage is their massive customer base, especially on Venmo. If they integrated into Venmo, I could see it being a big deal. But I don't know if it's going to be a major needle mover for the business. I think it could just be a value-added service.

Moser: Yeah. Jumping out there right now just saying, PayPal management, Dan Schulman or you guys, not Dan Schulman, I'm sorry. But you guys, please, please, don't acquire. I'm sorry, this is Dan Schulman, but don't acquire Robinhood, please. Just don't. I would rather see you try to build something and fail, than do something like acquiring a Robinhood and obviously did that. Matt, there is another company out there, they having a really, really good day. When I say a really, really good day, I'm talking about stock up 44% as We're talking, as We speak. Affirm, We saw the headline come out at the end of last week. Affirm has forged a very important relationship or potentially very important relationship with Amazon. Amazon customers will soon have the option to be able to split the total cost of purchases of $50 a more into simple monthly payments by using Affirm. What do you make of this headline? This is a big reaction for Affirm and probably a little bit of an overreaction considering this is just something that's getting some traction here. But given what We know about Affirm, given what We know about its reliance on another big customer, this is definitely just what the doctor ordered.

Frankel: As you alluded too their big customer is Peloton, and this couldn't have come at a better time. Peloton have been following, just slashed the price on its bikes, lowered its sales expectations. It's really a great time for this to have happened. Affirm you mentioned the stock is up, I think it was 44% right before I popped on here.

Moser: Yeah.

Frankel: It's still about 33% below its 52-week high, so this isn't like a Bill.com that's been on a tear for a year and then shot higher. It's just making up some lost ground, so that's point number one. They hit the lottery, [laughs] in terms of companies that buy now pay later providers we're pursuing. We mentioned when we talked about Square's acquisition of Afterpay, that Amazon was part of their universe, but that was part of Afterpay's app. Afterpay would allow people to split Amazon purchases on their own app. This is Amazon's first direct partnership with a buy now pay later provider. Why is it important, other than the fact that Amazon is just huge? [laughs] This is a huge needle mover for the company. I was reading that if they can get one% of Amazon's North American sales volume, one%, that that would add 10% to Affirm's revenue right away. That's one%. Right now nine% of all e-commerce sales globally are bought through buy now pay later. That's why this is such a red hot space. If they can get nine%, the current market size, so if they can get nine% of Amazon's sales volume, that would double their revenue virtually. It's a big deal.

Moser: Yeah, it does have a lot of potential there. I tell you, when I first read this headline, the first thing I thought of was I knew that I had seen some form of installment payment option on Amazon before. I've never used it, but I just knew I had seen it. I went to go look again to see exactly what I was remembering. What they have essentially, it's pay over the course of six months, for example, interest-free with your Amazon Prime Rewards Visa card. They do have an installment payment option for certain products on Amazon. That's just something that they run through their Amazon Prime Rewards Visa card. I guess the next logical question is, why not just continue to pursue that? I think ultimately at the end of the day this is just about more choice. It's giving your customers more options. I think from that perspective, it's a no-brainer for Amazon, you're just giving your customers more choices. But for Affirm, this is just a massive win for business,. Where I think a lot of a lot of folks have looked at businesses like Afterpay and Affirm, and thought, well, those are features that other bigger fintech-type companies could just introduce to their platforms. Then certainly we saw Square go ahead and make that acquisition of Afterpay. The natural conversation beyond that was, who do we think might acquire Affirm, but maybe this buys Affirm a little time to try to make it on their own.

Frankel: Or maybe if it works, Amazon will acquire them.

Moser: Maybe.

Frankel: There are advantages. You mentioned Amazon's credit card. Not everyone wants a new credit card.

Moser: Yeah.

Frankel: Affirm has that option. A purchase wouldn't affect the buyer's credit score if they purchased it on an installment plan as opposed to a credit card. If you max out your credit card, it can be devastating to your score. But if you finance say a new entertainment center using Affirm's installment program, it wouldn't affect your credit score adversely. There are some big benefits for consumers to do this where it would really make sense. I don't want a maxed out credit card showing on my credit.

Moser: [laughs] I know.

Frankel: If I were to finance a big purchase, that could be a good option for me because I know it won't affect my credit score as long as I pay it on time.

Moser: Well we shall see how this shakes out for Affirm, no doubt, good news for the business and for Affirm shareholders, it spreads the risk around for them a little bit, less reliance on one big customer. Honestly when you consider Amazon, that is a massive network of a lot of third-party providers as well. Tremendous potential there, no doubt about it, and certainly understand the market's enthusiasm. Matt, real quick, before we wrap up, let's just give our listeners here a couple of stocks to watch for the coming week. What's the stock that you have got your eye on this coming week?

Frankel: I'm watching in nCino, ticker symbol NCNO. They provide that bank operating system. We've talked about them on the show before. First-quarter numbers were good. Their second-quarter guidance isn't calling for a lot of growth, it's calling for revenue to rise by maybe one% versus the first quarter. It's calling for subscription revenue to tick up by a million dollars, which is about a two% gain. It's still calling for a small operating loss. If there was one company this week that I think could surprise the market, it would be nCino.

Moser: nCino. Well I'm going to keep an eye on DocuSign, as we're wrapping up our earnings season and DocuSign reports on Thursday, after the market closes, ticker DOCU. DocuSign seems to have a pretty good track record of under-promising and over-delivering. They're calling for revenue growth this quarter of 40-42%. Wouldn't shock me to see them exceed that. Billings growth, they're guiding for 35-38%. Billings is always interesting just because the actual numbers in billings and the guidance for billings, there's some timing issues there, they could be a little bit lumpy and it can make the market maybe think there's some problems there that aren't really actually there. It's always worth keeping an eye on those billings numbers because they can open up a little bit of a window of opportunity sometimes. But I just thought it was really impressive. Last quarter they saw customers with an annual spend greater than $300,000. That customer base grew 42% from a year ago. Clearly they are doing something right. They just crossed the one million customer mark, and they continue to grow those big-spending customers as well. Looking for hopefully another very good quarter from DocuSign, one that we enjoy following here at the Foolish Universe. One that has performed very well for a lot of our listeners and members alike. But those are the companies we'll keep an eye on. Matt, I think that's going to do it for us this week. Listen, I appreciate you juggling everything that you got going on this week and being able to find the time to join us.

Frankel: Of course, that's what we're all doing these days.

Moser: That's right.

Frankel: We do what we can.

Moser: Well that's going to do it for us folks. Remember, you can always reach out to us on Twitter @MFIndustryFocus, or you can drop us an email at [email protected] As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or against. Don't buy or sell stocks based solely on what you hear. Thanks as always, to Tim Sparks, for putting the show together for us, for Matt Frankel, I'm Jason Moser. Thanks for listening, and we'll see you next week. Right on time. Let me export this real quick. Then we are handing it off to somebody. Matt, who are we handing it off to?

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Matthew Frankel, CFP owns shares of Lemonade, Inc., SoFi Technologies, Inc., and Square. The Motley Fool owns shares of and recommends AFTERPAY T FPO, Affirm Holdings, Inc., Amazon, Bill.com Holdings, Inc., DocuSign, Facebook, Lemonade, Inc., PayPal Holdings, Peloton Interactive, SoFi Technologies, Inc., Square, Twitter, and nCino, Inc. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon, long January 2022 $75 calls on PayPal Holdings, and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

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