The New Year is upon us, but investors won't have too much new information until public companies release their next round of earnings. For most companies, it's the fourth quarter, which is the holiday season. That's the best for retail, which trickles down to higher seasonal sales for all kinds of industries.
This year, businesses are still feeling the impact of inflation, but many are seeing signs that it's beginning to moderate. Bill Holdings (BILL 3.21%) is a business-to-business company whose clients have been pulling back as they reduce their budgets, but it's still demonstrating strong momentum. However, it's not profitable, and its stock is fairly expensive. Let's dive in and see what to make of it.
Buy: Strong growth, big opportunities
Bill has been reporting strong growth since it went public. Sales growth remained high until very recently, and even in the most recent quarter, the 2024 fiscal first quarter (ended Sep. 30), it was up 33%, which marked a slowdown.
The company operates a software-as-a-service platform that automates accounting and back-end business services. It calculates payments, payables, and receivables and automates the work. These are important parts of any business, and Bill's platform helps its clients run their companies more smoothly, freeing up time for employees and leading to cost savings.
It makes money in two ways. One is from its monthly subscription services, which are sticky and provide monthly recurring revenue. The second is from processing fees. It has relationships with the financial institutions in its network and can send and receive payments, and it takes the fees from these institutions. It has more than 470,000 clients on the platform and 5.8 million network members. Management says that the slowdown in growth is not coming from fewer clients signing up, but from clients on the platform spending less, leading to lower payment volume and fees.
It has identified a huge global opportunity with more than 70 million small businesses, $344 billion in software spend, and $125 trillion in payment volume. Although it targets small businesses, it has white-label services that are used by many large U.S. banks.
Sell: Net losses are holding back the stock
Bill is still in a high-growth stage, and expenses have been piling up, leading to net losses.
BILL Net Income (Quarterly) data by YCharts
Management says that as the environment remains pressured, it's turning its focus to tighter expense control to be in a better position to scale up when the economy improves. Expense management did improve last year, as did profitability. Gross margin widened from 80.4% last year to 81.6% this year in the first quarter, and operating loss narrowed from $87.7 million to $56.6 million. But that's still pretty high. Management is forecasting continued pressure in the near term, with a revenue increase of about 16% in fiscal 2024. Investors would want to see sustained improvement here, and that's going to be more challenging until the macro picture turns more positive. For that reason, the stock may not move up significantly.
Hold: Bill stock is expensive
Bill stock dropped 25% in 2023. Its valuation has declined as well, but it still trades at a high price-to-sales ratio of 7.3. It was much higher in the previous bull market, but this is a premium valuation.
Bill is a risky growth stock, but the long-term outlook looks bright. It's not for the risk-averse investor, but it's positioning itself for growth in the coming years, and some investors with a long-term horizon might be interested in taking a position.
