What happened
Bill.com (BILL 0.24%) tumbled 24.5% in January, according to data from S&P Global Market Intelligence. There wasn't any major news on the company, but it was one of the many victims of the growth stock sell-off.
So what
Bill.com provides back-office financial software to small and mid-sized businesses. Its cloud-based, AI-enabled platform leads to more efficient billing, collection, and cash flow management for its customers. That's turned Bill.com into a popular fintech stock with tons of promise.
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The company is growing quickly. On Feb. 3, Bill.com reported quarterly sales growth of 190%, smashing both guidance and analyst estimates. That marks a rapid acceleration from the previous quarter, when its revenue rose 150%. The company revised its full-year revenue guidance sharply higher and cut its net-loss projections nearly in half. Bill.com is also right around free-cash-flow breakeven, so it's not burning a ton of cash to achieve these enormous growth rates.
This information wasn't available in January, but there doesn't seem to be any reason that investors would be concerned about Bill.com's overall fundamental situation. During the month, the stock's price-to-sales ratio dropped steeply from 55 to around 35, before closing the month higher at 42.
BILL price-to-sales Ratio data by YCharts
Bill.com stock endured a serious drawdown last month, and it was due entirely to market forces. Slowing economic growth and rising interest rates are causing investors to flee growth stocks. Other large-cap tech stocks with high valuations fared similarly.
Now what
Bill.com's stellar earnings report for the fiscal second quarter of 2022 drove a rapid recovery for the stock, and now it's only 7% lower than it was before the January dip. Its price-to-sales ratio is back above 50. Because the company's growth is so spectacular, investors are forced to take a leap of faith. A price-to-sales ratio above 50 is high, and it assumes lots of operational success in the future. However, if Bill.com can sustain a high growth rate and eventually attain profitability, its fundamentals could easily support a valuation much higher than its current one. It's a high-risk, high-reward situation, which is common among growth stocks.
In the short term, Bill.com shareholders should expect ongoing volatility. The past few months have cleared a lot of speculation and "froth" from the stock market, especially for stocks with high valuations. Bill.com is still priced aggressively, and those are the exact sorts of stocks that tend to struggle through Federal Reserve rate hikes and corresponding periods of reduced risk appetite. It will be a few more months before Bill.com can impress investors with strong earnings, so it's going to be at the will of market dynamics for a while.
