Bill.com (BILL 1.81%) has been one of the most highly valued tech stocks on the market in the past few months, so the sell-off in early 2022 has hit the company hard. Shares have fallen almost 30% from their all-time highs set in November 2021, but even after this, the long-term history tells an appealing story: Shares are still up more than 530% since its IPO in late 2019.
Bill.com has been a major winner because of its unique offering that has been used by thousands of businesses, but there are plenty of risks for this company. While it is helping small and medium-sized businesses (SMBs) become more digital when it comes to their back-house financial operations, there are worries about how Bill.com could succeed over the next five years. Investors could make this a small bet in their portfolio, but it is not a no-brainer investment.
Image source: Getty Images.
A major winner
Bill.com is solving a huge problem in the SMB space. When it comes to the financial back-office operations for small businesses, more than 90% of the work is still done manually. As a company grows, it gets harder to track all of its cash inflows and outflows manually. Not only is manual tracking cumbersome, but it can also lead to mistakes and take time away from growing the actual business.
Bill.com created a system where SMBs can digitally track, pay, and collect money. This has allowed customers to spend 50% less time paying bills, by automating these processes. Now, employees can focus on the business, not the back-house operations.
NYSE: BILL
Key Data Points
The company sells its products primarily through accounting firms, which has been a successful strategy. After all, if Bill.com only has to sell to one accounting firm and that firm recommends its products to dozens of its SMB customers, that is a major payback on its initial investment. The company has partnered with over 85% of the top 100 U.S. accounting firms and over 5,400 firms overall.
Bill.com has soared more than 500% in a little over two years as a public company, and that is because the company has seen major success. Its organic customer count reached 135,000 in second-quarter 2022, which ended Dec. 31, 2021. The company makes the majority of its revenue from transactions made on its platform, so its total payment volume growth of 62% year over year in Q2 resulted in strong top-line growth. On an organic basis, its revenue grew 85% year over year.
The risks that lie ahead
Despite this success, there is considerable risk with this company. The first concern is that Bill.com is burning lots of cash. In the first six months of its 2022 fiscal year, its free cash flow burn was over $41 million, and this grew 60% from the year-ago period. This represented more than 26% of revenue, and with it getting worse, that is not a good sign.
The company's partnerships are a great way to gain customers, but it is also risky. If a major accounting firm were to stop promoting Bill.com's products, that could result in a big customer loss. This happened in late 2018 when it lost 5,000 customers because one accounting firm decided to end its partnership. Another source where the company gains a lot of customers is Intuit (INTU 0.25%). With this partnership, Bill.com has gained thousands of customers, but Intuit could decide to build its own version of Bill.com and terminate its partnership. Considering that Intuit is a leading accounting software platform for SMBs, it has the potential to cut off a big customer acquisition channel for the company.
The last concern is Bill.com's valuation. Even after this tech sell-off, it trades at a valuation of 50 times sales. Considering that many tech stocks -- like Amplitude -- are now trading at a low-teens or high single-digit price-to-sales ratio, this company could get cut in half and still be expensive.
Is Bill.com a buy?
Bill.com is attacking a market that comprises nearly 20 million SMBs globally, but this company is not a screaming buy today. Its dependence on Intuit and its large accounting partners could become a problem if any of them decide to end their partnership. On the other hand, Intuit is known for expanding its reach in the SMB space, so it is not unrealistic for them to create a competing solution.
The other reason you might want to hold off today is free cash flow burn. While the company has nearly $2.8 billion in cash and investments on its balance sheet, a cash-burning company is very risky, especially when its cash flow burn is increasing. While Bill.com might continue to see success over the coming years, it would be smart to sit on the sidelines until its cash flows turn around.
