With the explosive growth of the "Magnificent Seven" stocks, the S&P 500 has put in a sustained rally throughout 2023. Its total return level is 25% this year, more than double its long-run average of a 10% compound annual growth rate (CAGR). But a lot of smaller stocks -- especially unprofitable technology companies -- failed to join the party.
Enter Bill Holdings (BILL 3.21%). The financial technology platform for small and medium-sized businesses (SMBs) is down 25% this year despite posting 33% year-over-year revenue growth last quarter, perhaps presenting a buying opportunity for investors focused on the long term. Let's see if Bill Holdings is a beaten-down stock poised for a rebound in 2024.
Providing value and saving time for small businesses
Bill Holdings, owner of Bill.com, provides accounting and payment solutions to SMBs. These include services like accounts payable reconciliations, digital invoicing, and expense management. Historically, accounting and payments have been a headache for smaller companies, wasting tons of time and money for employees and owners. With the advent of modern payments and the cloud, Bill.com was able to bring software solutions usually reserved for large enterprises to the masses.
So far, its solutions have been resonating. Bill.com was serving just under 500,000 businesses and processed $70 billion in payments last quarter. Revenue grew 33% year over year to $305 million. Over the last five years, its revenue has grown by over 900%, making it one of the fastest-growing companies in the world.
The company has fantastic gross margins, above 80%, showing the low incremental costs it takes to serve new customers. On top of strong unit economics, Bill.com is able to earn interest income from the cash it holds for customers, which was $40 million last quarter. That was more than 10% of Bill Holding's overall revenue in the quarter.
Ironically, the downside of Bill Holdings -- and likely why the stock is still in the dumps -- is its own expense management. Despite high gross margins and interest income, the company's operating margin over the last 12 months was negative 23% as it spent aggressively on marketing and other overhead costs. Investors are looking for this to improve over the next few years.
BILL Revenue (TTM) data by YCharts
Competition from private and government sources
Bill.com's growth track record is fantastic. However, these impressive results attracted some powerful competition, none more so than Quickbooks. Owned by Intuit, Quickbooks is the dominant player in small business accounting with an estimated 85% market share. Many Bill.com customers likely also use Quickbooks for their general accounting management.
In recent years, Quickbooks started to encroach on Bill.com by copying its product suite. This is a troubling development for Bill.com. Quickbooks has widespread adoption already, making it easy for the company to add new products for existing customers or upsell them on new services. Bill.com -- despite its strong growth -- is still much smaller than this older competitor. There is probably room for both companies to win here, but increasing competition from Quickbooks is not a good thing for Bill.com's growth plans.
On other fronts, Bill.com's interest income may be under threat. The U.S. government recently released its instant payments solution called FedNow, which it hopes will disrupt the legacy automated clearinghouse (ACH) method. There is also competition for instant payments from large players such as Visa. How does this affect Bill.com's interest income advantage? If companies are able to reconcile their accounts payable instantly, they won't have to leave cash temporarily on Bill.com's balance sheet.
To be clear, FedNow and other solutions don't eliminate the need for Bill.com's software solutions, but they have the potential to take away the 10% of its revenue that comes from earning interest income on customer cash it holds.
But is the stock cheap?
As of this writing, Bill Holdings has a market cap approaching $9 billion. Over the last 12 months, the company has generated $1.1 billion in revenue. Predicting its steady-state profit margin is difficult given it is currently unprofitable, but it will likely be high due to its 80%-plus gross margins. On a generous 30% net profit margin, Bill Holdings would be generating $330 million in earnings based on its trailing-12-month revenue.
Divide this by its market cap and Bill Holdings would have a price-to-earnings ratio (P/E) of 27, or slightly above the market average. What does this mean? Two things. First, the market is pricing in a lot of future revenue growth for this company. Second, there is an expectation that Bill.com will have very high profit margins at maturity.
There is no reason to think Bill.com's revenue will stop growing, but its profit margin is nowhere near 30%. Unless this changes soon, I think it is unwise to buy shares of Bill Holdings at these prices.
