The market rally brings good tidings for investors this holiday season. The S&P 500 is up 23% this year and at the edge of a bull market, and bull markets bring rising stock prices.
However, bull markets are not without dangers. Legendary investor Warren Buffett has cautioned investors about rising valuations in bull markets that aren't sustainable, and many investors have benefited from his credo about being fearful when others are greedy.
That doesn't mean not to buy stocks in bull markets, but to be discerning, as always. There are great investing opportunities in any kind of market, and you often have to look for ones the Wall Street herd is missing.
Investors have been down on Bill Holdings (BILL 3.21%) stock for a while, and it's 75% off its highs. It hasn't fared well in 2023. Can it bounce back in 2024?
Short-term pressure is holding it back
Bill provides financial automation solutions for small businesses that simplify accounting, accounts payable and receivable, expenses management, payments, and more. Part of its attraction is the automation, and part of it is the complete ecosystem that connects clients with financial institutions and keeps everything in one place.
Bill had been posting high growth, but it stumbled in the inflationary environment. Small business clients are experiencing pressure and slashing their budgets, hindering Bill's growth prospects for the time being.
Sales growth is slowing down, but sales still increased an impressive 33% over last year in the 2024 fiscal first quarter (ended Sept. 30). However, management is only projecting full-year sales growth of about 16%. Even worse, that implies full-year sales of about $1.2 billion, and Wall Street was aiming for $1.3 billion. Bill stock was already declining before the first-quarter report, but it plunged after that.
Keep your eye on the long term
There are several compelling features in Bill's model that should make investors sit up and take notice. One is that it makes money from two directions: Client packages, and fees from the financial institutions that are part of the ecosystem. Bill has more than 470,000 clients and works with 5.8 million partnering institutions, or network members.
Another is that it's an asset-light platform model, which lends itself to high margins and profitability. Bill reported an 81.6% gross margin in Q1, up from 80.4% last year. Net loss narrowed from $81.6 million to $27.9 million, and adjusted earnings per share improved from $0.14 to $0.54, beating Wall Street's average forecast of $0.38.
It's not hard to see why Bill's software appeals to small businesses. Large companies can create their own software or outsource to large business-to-business providers, but small businesses have limited budgets to begin with and might be priced out of many service packages. There are also few companies that offer the complete end-to-end experience that Bill offers, even for larger organizations. It sees a large addressable market in small business spend and business-to-business payment volume.
Image source: Bill Holdings.
Is now the right time to buy?
Given the expected sales slowdown, Bill cut its workforce by 15% in early December and is closing operations in Australia to allocate its resources to core activities. This should help profitability, especially as clients cut back. It will incur around $30 million in cash charges, mostly appearing on the fourth-quarter financial statements. That's a good move right now.
After going public, when it was posting soaring growth rates, Bill stock was trading at an unreasonably high valuation topping off at 103 times trailing 12-month sales. It's now down to just below 8, which is well below the all-time average.
Data source: YCharts
Does that make Bill stock a good deal right now? It's still objectively expensive, but Bill offers a compelling growth story with the likelihood of reaching net profitability as it scales. The long-term outlook looks promising, and risk-tolerant investors with a long time horizon might consider taking a position.
