Bill.com Holdings Inc. (BILL, Financial) offers a powerful payments platform, which enables small-medium sized businesses, or SMBs, to improve their financial efficiency. The company was founded in 2006 and became publicly listed in 2019.
Since then, the share price has climbed 342%, which really does tell the story of this software platform well. Bill.com currently serves approximately 1.75% of the global SMB market, indicating there is a large growth runway ahead valued at $239 billion.
Hedge fund manager Steve Mandel (Trades, Portfolio) bought shares in the first quarter at an average price of $208 earch, which is approximately 43% above where the stock trades today. Let’s dive into the business model, financials and valuation to determine if it could be a good opportunity.
Business model
The company offers a one-stop shop for SMB financial operations. Its cloud-based software automates the complex back office of businesses. The main services include helping SMBs to automate their accounts payable and accounts receivable. Ultimately, the idea is to free up small business owners' time so they can focus on strategy and stay compliant. Bill.com also uses artificial intelligence to leverage the unique business data they have to offer embedded financial services.
The platform also integrates with over 200 apps, enabling accounting databases to be in sync and organized in real time. The platform has a high net promoter score of 81, indicating customers find value in it.
Source: Bill.com
In 2021, the company made two acquisitions: Divvy and Invoice2go. Divvy is an expense management platform that enables companies to easily issue employees with corporate credit cards and track expenses. In terms of company protection, it has 10 patents.
As for Invoice2Go, it is a mobile and web app designed as a simple invoicing, expense-tracking and reporting tool for micro and small business owners.
Growing Financials
Bill.com has grown revenue at an incredible rate. In its fiscal third quarter of 2022, organic core revenue increased 74% year over year. If we include the recent acquisitions of Divvy and Invoice2go, total revenue grew 179% to $166.9 million.
Bill.com has high gross margins, which have hovered between 77.6% and 85% and is characteristic of a SaaS business. However, the operating profit margin is negative as the company invests a lot ($402 million in the trailing 12 months) on sales and marketing to drive new customer acquisition.
The company has a strong balance sheet with $2.79 billion in cash, $1.13 billion in current debt and $1.77 in long-term debt. The 124% dollar-based net retention rate is above the industry average, which indicates customers are staying and increasing their spending.
In terms of valuation, Bill.com trades at a price-sales multiple of 22.6. This is higher than other companies in the industry, such as Block Inc. (SQ, Financial) (formerly Square) that trades at a price-sales ratio of 2.55, though it does have a much lower gross margin of 25% and slower revenue growth.
Bill.com is also priced at a higher valuation than Intuit Inc. (INTU, Financial), which owns Quickbooks and trades at a price-sales ratio of 9.
However, the good news is Bill.com is trading at the low end of its historic valuation, but this is still relatively high and means the market has a lot of expectations for the company.
Final thoughts
Bill.com is a fantastic company which offers a popular SMB financial platform. The company has high retention, a strong NPS score and high revenue growth rates. However, the valuation is very high (even after the pullback) and given the rising interest rate environment, valuation multiples have compressed substantially. However, the high valuation has not deterred investors such as Mandel and Ron Baron (Trades, Portfolio). Those investors even paid a much higher price than where the stock trades today, mainly due to macroeconomic conditions. For me, this company is a great one to add to the watch list for a more reasonable entry point, given the plethora of opportunities in the market.
