This Fintech Reported Blowout Earnings and Has a $40 Billion Market Opportunity

Several financial technology companies, or fintechs, have reported impressive results in the past month or so, but Bill.com Holdings (BILL 1.07%) is one of the clear winners. In this Fool Live video clip, recorded on Aug. 30, Fool.com contributor Matt Frankel, CFP, and Industry Focus host Jason Moser discuss what made Bill.com's latest earnings report so strong. 

Jason Moser: 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.

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

Moser: Yes.

Frankel: It's not hard to see why. Their businesses is 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 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 billion dollars, $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. So 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 this 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 toward 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 (LMND 8.23%), I believe it was, you and I were 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 argument the stock looked 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's 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 on 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. It's $25 trillion.

Moser: Wow.

Frankel: Which 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.