Enterprise software was one of the hottest segments of the technology sector in 2021. Capital was cheap thanks to record-low interest rates, and software companies were spending it on marketing and product development to generate surging revenue growth, even if it meant they lost money at the bottom line.
But the era of cheap money is over, and most software companies now prioritize profitability. They are slashing costs, which affects their revenue growth, and that has forced investors to reassess their valuations.
Bill.com (BILL -2.37%) offers a portfolio of software products for small and midsize businesses (SMBs). Its stock price is down 85% from its all-time high, but here's why it looks like a bargain right now based on one widely used valuation metric.
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Critical tools for small and midsize businesses
Small business owners tend to wear several hats. Along with managing day-to-day operations, they also handle marketing, product development, and even bookkeeping. Bill.com's software can shoulder some of that load because it's designed to streamline accounts payable, accounts receivable, and expense management workflows.
Bill.com's flagship product is a cloud-based digital inbox that collects incoming invoices. Bill.com automatically routes each invoice to the necessary person for approval, and the invoice can then be paid with a single click. Plus, thanks to integrations with leading accounting platforms, each transaction is automatically logged in the books.
Bill.com also developed an accounts receivable solution after it acquired Invoice2go in 2021. It allows businesses to create and send invoices, follow them up, and track incoming payments. The company says this solution helps its customers get paid twice as fast.
At the end of fiscal 2024 (ended June 30), Bill.com had 474,600 business customers across its product portfolio. Since 2018, the company has processed over $1 trillion worth of payments on behalf of its customers, making it one of the largest business-to-business payment platforms in the world.
Those nearly half-million customers represent a mere fraction of Bill.com's global opportunity, which consists of over 70 million SMBs globally and $125 trillion worth of payment volume. The company plans to capture more of that market by leveraging its network of over 8,000 top accounting firms, its largest customer acquisition channel. Accountants encourage their business clients to use Bill.com because it simplifies their jobs, so it's a win for all parties.
Bill.com continues to make progress at the bottom line
Bill.com generated $1.29 billion in total revenue during fiscal 2024, which represented solid growth of 22%. But that was much slower than in fiscal 2023, when revenue grew by 65%, and fiscal 2022, when growth was a whopping 169%.
As already mentioned, Bill.com is carefully managing costs to improve its bottom line. It increased its operating expenses by only 6% year over year during fiscal 2024, and it actually trimmed its marketing spending by 7.2%. Simply put, investing less money in growth-oriented initiatives makes it very difficult to increase revenue as fast.
But on the positive side, Bill.com is making substantial progress at the bottom line. According to generally accepted accounting principles (GAAP), the company still generated a net loss of $28.8 million in fiscal 2024, but this was a significant improvement over its $223.7 million net loss in fiscal 2023. Plus, it actually generated a profit of $7.5 million in the final quarter of the year.
On a non-GAAP (adjusted) basis, which strips out one-off and noncash expenses like stock-based compensation, Bill.com generated a net income of $243.9 million in fiscal 2024, a 54.8% increase from fiscal 2023.
Bill.com stock looks like a great value
The 85% decline in Bill.com stock, combined with the company's continued growth, places it at an attractive level as measured by one widely used valuation metric.
Based on Bill.com's market capitalization of $5.7 billion and its fiscal 2024 revenue of $1.29 billion, its stock trades at a price-to-sales (P/S) ratio of 4.4. That's an 85% discount to its average P/S ratio of 31.2 since the company came public in 2019.
Bill.com's average P/S ratio is quite high, so I'm not suggesting it will get back there -- the average is heavily skewed by the tech frenzy in 2021 when the stock was trading at a P/S above 90. However, Bill's current P/S ratio also appears cheap when measured against a basket of other business-to-business enterprise software stocks:
Plus, based on Bill.com's $2.12 in non-GAAP earnings per share in fiscal 2024 and its current stock price of $53.48, it trades at a price-to-earnings (P/E) ratio of 25.2. For some context, the Nasdaq-100 Technology Sector index trades at 32 times its GAAP earnings. That isn't a perfect comparison because of all the adjustments required to calculate non-GAAP earnings, but it can be a useful reference point until Bill.com further improves its GAAP bottom line.
With all of that said, Bill.com stock looks attractive right now. The company is forecasting a further slowdown in its revenue growth during fiscal 2025, but it could also benefit from tailwinds over the next 12 months, like falling interest rates. Lower rates can be especially positive for SMBs because they often rely on debt to fuel their growth more so than their larger peers. Therefore, Bill.com could see increased software spending among its core customer base.
Given Bill.com's enormous addressable market, this could be a great entry point for investors who are willing to hold the stock for the long term.
