BILL Holdings: Still A Sell? Maybe Not (Rating Upgrade) (NYSE:BILL)

Olga Evtushkova/iStock via Getty Images Investment Thesis Nearly every investor who has invested in BILL Holdings, Inc. (NYSE:BILL) in the past 4 years is today looking at a loss in the portfolio. Can you imagine the feverish dislike for this stock? Think about all the negative emotions that investors must hold here. For a large part, the bulk of its investor base had one thesis in mind, the share price was higher in the past. Therefore, it will return to its former highs in time. At some point. It has to. It must. And for a while that thesis holds its ground, until suddenly, it no longer holds its ground, and investors capitulate. Investor Capitulation (with a capital C). And yet, here I stand and in the face of this bearishness, I’m going to reverse my bearishness for this stock. I estimate that BILL today is priced at 19x next year’s non-GAAP operating profits. Simply put, there’s a lot of bad news that is already priced in here. What made me change my mind? Read on. Rapid Recap Back in April, I said, Despite already falling 75% from its peak, I argue that this stock remains overvalued and does not warrant investment. Author’s work on BILL This was a really tough call to make. At the time, I downgraded BILL from a hold to a sell. The stock proceeded to sell off more than 20%, even as the S&P 500 (SP500) continues to press ahead and is up 5% in the same time. And yet, despite making this tough but accurate call, I now reverse my position back to a hold. BILL Holdings Near-Term Prospects BILL Holdings helps small and medium-sized businesses manage their financial operations by providing a platform that automates tasks like paying bills, sending invoices, and tracking expenses. Their system simplifies money movement and offers various payment options to make financial transactions faster and more efficient. BILL’s near-term prospects appear to be on the cusp of stabilizing. Case in point, fiscal Q3 2024 saw BILL’s revenue increasing by 19% y/y while its non-GAAP operating income increased by 68% y/y. This is not such a terrible performance if you think of it. And yet, its headwinds persist. The stabilization of customer spending without significant expansion suggests that the company is seeing challenges in driving higher transaction volumes and revenue growth in the near term. Furthermore, the ongoing negotiations with Bank of America, which have yet to yield specific results, could pose uncertainties regarding BILL’s other partnership outcomes. Given this balanced background, let’s now discuss its fundamentals. Bill’s Revenues Next Year Will Reaccelerate to 15% to 17% BILL revenue growth rates Investors are eyeing up one final quarter of tough comparables. More specifically, fiscal Q4 2024 is up against fiscal Q4 of the prior year, when its revenue growth rates were up 48% y/y. Consequently, starting next the following quarter, fiscal Q1 2025, Bill comparables start to rapidly ease up to the point that this time next year, investors will be eyeing up a more “stable” business. For investors, this will be a very different setup. No longer will they be faced with quarter after quarter of decelerating growth rates. Add to its stable revenue growth rates, a new narrative coming out of its management team, and all of a sudden, investors will be cheering for BILL once again. This context is important, particularly given that its valuation isn’t stretched anymore. BILL Stock Valuation — 19x Forward Non-GAAP Operating Profits Following BILL’s recent repurchases of its 2025 convertibles, approximately $165 million of 2025 remain outstanding. Certainly, part of the bull case for investors is that BILL holds more than $1.5 billion of cash and marketable securities, which provides BILL with substantial flexibility. Especially since the business is clearly free cash flow generative. Here’s the fact of the matter, let’s presume that BILL continues to drive forward its non-GAAP operating margins into the next fiscal year. That would mean that next year, BILL would deliver approximately 18% non-GAAP operating margins, or approximately $270 million of non-GAAP operating margins. This leaves BILL priced at 19x forward non-GAAP operating profits. That’s not a terrible valuation, by any stretch. As such, it’s very difficult to keep a sell rating when the company is very close to stabilizing its operations, despite the challenging macro environment, and all the while, it’s delivering growing free cash flows. BILL Q3 2024 The Bottom Line In conclusion, my stance on BILL Holdings turns to neutral despite its continued challenges. While many investors have suffered losses, the current valuation of BILL at 19 times next year’s projected non-GAAP operating profits appears reasonable. The stock has undergone significant correction and now seems to reflect much of the pessimism surrounding its business outlook. Recent financial results indicate stabilization, supported by strong profit growth in fiscal 2024. All considered, BILL Holdings, Inc.’s valuation does not appear overly expensive given its improving fundamentals.

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