When it rains, it pours. Waning enthusiasm for growth stocks that pulled the Nasdaq Composite index more than 7% lower since mid-July has been felt even more powerfully at Bill Holdings (BILL 3.21%). Shares of this provider of automated accounting solutions for small businesses have fallen around 18% from the high-water mark they set this July.
Bill Holdings recently announced fiscal fourth-quarter earnings, and the results were far more positive than the stock's performance would suggest. The disconnect between the company's performance and its stock price has plenty of investors wondering whether this stock could be a bargain.
Let's weigh the reasons to buy Bill stock against the risks to see whether it's a smart buy now.
Reasons to buy Bill Holdings right now
On Aug. 17, Bill reported results from its fiscal fourth quarter that ended on June 30, and they were more than encouraging. For the year, total business-to-business (B2B) payment volume reached $266 billion. That's 176% more than the company reported in fiscal 2020, the year it began trading publicly.
The payments Bill processed over the past year work out to about 1% of America's gross domestic product, or GDP. That milestone means the company has a strong toehold in the B2B payments industry. It also means there's still plenty of room to grow.
The number of businesses Bill serves reached 461,000 at the end of June, but this is just the tip of the iceberg. There are around 30 million small businesses in the U.S. and 70 million globally. Most small businesses still rely on manual processes to manage B2B payments, so there could be years of rapid growth ahead.
I'm particularly encouraged by the variety of non-tech-related businesses that benefit from Bill's automation services. Its software-agnostic network doesn't require a subscription, so even 100-year-old farms are able to automate their back office with Bill's services. As a result, fiscal 2023 transaction fees rocketed 57% year over year to $691 million.
Image source: Getty Images.
Reasons to remain cautious
Bill's bottom line recently crossed into profitability on an adjusted basis. According to generally accepted accounting principles (GAAP), though, it lost $15.9 million in its fiscal fourth quarter.
Bill's business has grown so quickly in recent years that the stock market has big expectations. The stock has fallen from its previous heights, but it's still trading for the nosebleed-inducing multiples of 11.1 times trailing sales and 58.6 times the midpoint of management's earnings estimate for fiscal 2024.
Reaching the midpoint of the guided earnings range management provided would result in earnings growth of just 16% in fiscal 2024. This is hardly a growth rate to complain about, but it's too slow to justify the stock's nosebleed-inducing valuation at the moment.
If the slowdown Bill is predicting in the year ahead continues in subsequent years, investors who buy the stock at its present valuation could experience significant losses.
A buy now?
A complicated macroeconomic environment makes predicting the future growth of Bill or any B2B payment service provider extra challenging. An extremely high valuation makes buying the stock now really risky. That said, economic conditions could improve in the quarters ahead and drive the stock to new peaks that it never looks back from.
Instead of trying to predict the economy's future, it's probably best to make smaller, more frequent purchases of this stock. This practice, known as dollar-cost averaging, gives you a chance to reap big gains if the stock never looks back while minimizing your overall risk.
