Bill: A Financial Process Automation Leader

The buzzword of the year is without a doubt, “AI”. With generative AI taking the world by storm, investors’ expectations are through the roof. Tiny companies with “AI” in their name are seeing triple digit returns on their stocks in the span of a couple months with people everywhere riding the hype train. Amid this generative AI mania lies Bill.com (BILL), a company using artificial intelligence in a much less sexy way.

We first mentioned Bill.com (or simply “Bill”, as it is now known) in our 2021 piece on 5 Pure-Play Stocks for the B2B Payments Thesis. At the time, Bill had a simple valuation ratio (SVR) of 96 – a truly massive valuation. For reference, our most richly valued holding, Nvidia (NVDA), currently has an SVR of 28, and we don’t invest in anything with a ratio greater than 20 these days (down from 40 during the bull market). Consequently, we weren’t interested in Bill back then. Here’s how we concluded our last piece:

As for company spending, we see several stocks we might like now – AvidXchange and Billtrust – and one we might like at a lower valuation – Bill.com.

Nanalyze – October 2021

Since Bill.com was drastically overpriced, we went long AvidXchange (AVDX). Late last year, Billtrust was acquired by a private equity firm for roughly what the SPAC valued it at – $10 a share. As for Bill.com, shares have fallen 75% giving the company a simple valuation ratio of seven (compare that to our tech stock catalog average of six). Indeed, we like Bill a whole lot more at that lower valuation.

Fits the Bill

Bill was founded in 2006 by René Lacerte, an ex-senior manager at Intuit (INTU) who had just stepped down from his previous startup, payroll processing company PayCycle. Originally called Cashboard, Bill offers an AI-powered all-in-one financial operations platform for small- and medium-sized businesses (SMBs). In other words, Bill helps SMBs manage budgets, pay their bills, receive payments, automate their accounts receivable and accounts payable functions, and store their books in the cloud. It integrates seamlessly with QuickBooks and Netsuite to make things easy.

Their primary mission, touted on the first page of their investor deck, is to “make it simple to connect and do business”. As a small business ourselves, this is something we can get behind. Small businesses are faced with the ongoing problem of training a tight group of staff – who already have too much to do – on a myriad of different types of software. This is why we like the “KISS” strategy: Keep it Simple and Straightforward.

In a recessionary environment, companies will be looking for any way they can to cut costs. Bill seems to be a great solution here. Hire Karen in Accounts Payable for the cost of a salary and benefits, or let software automate the process for you?

Dissecting the Bull Case

We have always been interested in the business to business (B2B) payments space because it represents more than double the opportunity than that of consumer payments. Credit Suisse estimates the total addressable market (TAM) for global B2B payments at around $125 trillion, and capturing a tiny fraction of that would make for a lucrative high-margin opportunity. Bill is capturing more and more of that space, as they were the fastest growing public Software-as-a-Service (SaaS) company in 2021 (though a good chunk of this growth can be attributed to acquisitions, which we’ll talk about).

Bill gives us a lot to like in terms of financials: juicy gross margins of 87%, a respectable net retention rate (NRR) of 131%, beating the 2022 SaaS industry average of 114%, and strong double-digit annual revenue growth.

What we need to ask ourselves now is: Is Bill a leader in B2B payments? We only invest in leaders which can be determined by three metrics: market cap (the overall size of the company), revenue growth (how quickly the company is capturing market share), and annual revenues (how much of the market the company already controls). The below chart shows the major players in the B2B payments universe.

It’s easy to identify one clear loser – Expensify (EXFY) – which has the lowest market cap, smallest revenues, and weakest growth of the bunch. This (along with their senseless move of bringing politics into their business) makes them a clear “Avoid” for us. As for Fleetcor and WEX, we previously concluded that “employee spending” wasn’t a category we wanted exposure to.

Both companies are leaders in “virtual cards” with a fraction of revenues coming from the sort of accounts payable automation exposure we’re ideally looking for – FLEETCOR (20%) and WEX (10%). The rest of the exposure comes from T&E-type expenditures which are often among the first budget items that are frozen when times get tough, hiring being another.

Nanalyze – October 2021

Have these percentages changed? It’s hard to say looking at WEX’s latest quarterly deck, but we can be sure that “fleet solutions” isn’t a category we’re interested in (Samsara seems like a better way to get such exposure).

We want exposure to the back office connectivity business model – a hub and spoke model – which enjoys network effects and scales over time to capture large high-margin transaction volume. As we said in our previous piece, the only way to capture all the possible value in this theme is to look past the limitations of a SaaS model and focus on companies that are capturing a small percentage of the $125 trillion global payments volume out there, a decent chunk of which is currently navigated using Excel and paper by SMBs (Bill is currently processing around $250B+ in annualized payment volume).

As for FLEETCOR, just 23% of their revenues come form “Corporate Payments” while the rest come from categories like Fuel (40%), Lodging (13%), Tolls (11%), and Gifts (6%). Intuitively, FLEETCOR saw revenues plummet across the board when The Rona hit, presumably because corporate travel was reigned in. Do you know what other event causes corporate travel to shrink? That’s right Little Johnny, a recession.

Some Concerns

Bill’s recent quarterly earnings report saw shares down over 25%, a record amount, marking Bill stock’s worst ever trading day, which can be attributed to weak guidance calling for slowing growth in the coming quarter. When you ignore the noise and look at the actual numbers, it’s hard to believe investors would punish a company for expecting revenue growth over 50%.

Additionally, Bill stock saw some pressure during the recent Silicon Valley Bank collapse, as SVB is one of the banks Bill uses to process payments. The company claims they promptly re-routed all payments and that there is no negative impact to Bill’s operations. However, the stock still trades at levels not seen since 3 years ago, shortly after the company’s initial public offering (IPO).

It’s worth adding that in their most recent quarter, the company paid out $191M in stock-based compensation, compared to revenue of $260M in the same quarter. We recently wrote a piece about stock-based compensation (SBC), and in it we described some of the downsides of the practice, such as dilution: adding more slices to the pie, shrinking the pieces that shareholders already own. Your average tech company has SBC at around 20% of revenues, and Bill seems to be well above that. Concerns about increasing shares outstanding might be somewhat alleviated by the company’s recent announcement to buy back $300 million in shares, a good idea considering their current valuation.

Shares outstanding are also increasing because Bill has been on a bit of a shopping spree, nabbing up 3 companies in the span of 18 months. While we like to see market share being captured, we fear Bill may encounter the Teladoc problem: overpaying on acquisitions and being stuck with a mountain of goodwill on the books that will eventually be written off.

As of their last filing, Bill has $2.4 billion of goodwill on their books. Is that a lot? How long is a piece of string? One might argue that issuing overpriced shares to acquire other firms means it’s a wash.

We also like to see companies with geographically diversified revenues. Bill does not check that box, with 96% of their customers being US-based. It’s a concern that’s also shared with our AvidXchange holding.

Are We Buying It?

So, if we only invest in leaders, why are we long AvidXChange (AVDX)? Well, earlier we said we don’t invest in anything with an SVR over 40. When we went long AvidXChange, Bill was off the table because of an SVR over 90. Today, that’s a reasonable seven. So, does this mean we’re suddenly going to dump AvidXChange and go long Bill? Not quite. If you’re a long-time follower of Nanalyze, you know we only sell a stock for one of three reasons: our thesis changes, revenue growth stalls, or the stock exceeds 10% of our portfolio.

We’re presently in the red on our AvidXchange position, and we last caught up with the company late last year in a piece titled AvidXchange Stock Sees Strong Growth in B2B Payments. We invest in companies, not stocks. While AvidXchange’s stock has been hitting the skids, the company is motoring right along. We also can’t ignore that two payments firms have been recently gobbled up by private equity firms – Bottomline and Billtrust – which means that’s a possibility for AvidXchange. Sure, we always discourage speculating on M&A events, but couldn’t help but note this.

Conclusion

To summarize, we’re not convinced that locking in our AvidXchange losses to move into a Bill.com position makes sense right now. But if you’re someone sitting on the sidelines, we don’t see any reason why you wouldn’t consider going long Bill.com.

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