Bill: A Financial Process Automation Leader

The buzzword of the yr is undoubtedly, “AI”. With generative AI taking the world by storm, buyers’ expectations are via the roof. Tiny firms with “AI” of their title are seeing triple-digit returns on their shares within the span of a pair months with individuals in all places using the hype practice. Amid this generative AI mania lies Invoice.com (BILL), an organization utilizing synthetic intelligence in a a lot much less attractive means.

We first talked about Invoice.com (or just “Invoice”, as it’s now recognized) in our 2021 piece on 5 Pure-Play Shares for the B2B Funds Thesis. On the time, Invoice had a simple valuation ratio (SVR) of 96 – a very huge valuation. For reference, our most richly valued holding, NVIDIA (NVDA), at present has an SVR of 28, and we don’t put money into something with a ratio larger than 20 today (down from 40 throughout the bull market). Consequently, we weren’t desirous about Invoice again then. Right here’s how we concluded our final piece:

As for firm spending, we see a number of shares we’d like now – AvidXchange and Billtrust – and one we’d like at a decrease valuation – Invoice.com.

Nanalyze – October 2021

Since Invoice.com was drastically overpriced, we went lengthy AvidXchange (AVDX). Late final yr, Billtrust was acquired by a non-public fairness agency for roughly what the SPAC valued it at – $10 a share. As for Invoice.com, shares have fallen 75% giving the corporate a easy valuation ratio of seven (examine that to our tech inventory catalog common of six). Certainly, we like Invoice an entire lot extra at that decrease valuation.

Matches the Invoice

Invoice was based in 2006 by René Lacerte, an ex-senior supervisor at Intuit (INTU) who had simply stepped down from his earlier startup, payroll processing firm PayCycle. Initially known as Cashboard, Invoice provides an AI-powered all-in-one monetary operations platform for small- and medium-sized businesses (SMBs). In different phrases, Invoice helps SMBs handle budgets, pay their payments, obtain funds, automate their accounts receivable and accounts payable capabilities, and retailer their books within the cloud. It integrates seamlessly with QuickBooks and NetSuite to make issues simple.

Their major mission, touted on the primary web page of their investor deck, is to “make it easy to attach and do enterprise”. As a small enterprise ourselves, that is one thing we will get behind. Small companies are confronted with the continued drawback of coaching a good group of workers – who have already got an excessive amount of to do – on a myriad of various kinds of software program. In a recessionary setting, firms can be searching for any means they will to chop prices. Invoice appears to be an important resolution right here. Rent Karen in Accounts Payable for the price of a wage and advantages, or let software program automate the method for you?

Dissecting the Bull Case

We have now all the time been within the business-to-business (B2B) funds house as a result of it represents greater than double the chance than that of shopper funds. Credit score Suisse estimates the total addressable market (TAM) for world B2B funds quantity at round $125 trillion, and capturing a tiny fraction of that may make for a profitable high-margin alternative. Invoice is capturing increasingly more of that house, as they have been the fastest-growing public Software-as-a–Service (SaaS) firm in 2021 (although a very good chunk of this progress will be attributed to acquisitions, which we’ll discuss).

Invoice provides us quite a bit to love when it comes to financials: juicy gross margins of 87%, a good net retention rate (NRR) of 131%, beating the 2022 SaaS business common of 114%, and robust double-digit annual income progress.

What we have to ask ourselves now’s: Is Invoice a pacesetter in B2B funds? We solely put money into leaders which will be decided by three metrics: market cap (the general measurement of the corporate), income progress (how shortly the corporate is capturing market share), and annual revenues (how a lot of the market the corporate already controls). The beneath chart reveals the key gamers within the B2B funds universe.

It’s simple to determine one clear loser – Expensify (EXFY) – which has the bottom market cap, smallest revenues, and weakest progress of the bunch. This (together with their mindless transfer of bringing politics into their enterprise) makes them a transparent “Keep away from” for us. As for FLEETCOR and WEX, we beforehand concluded that “worker spending” wasn’t a class we wished publicity to.

Each firms are leaders in “digital playing cards” with a fraction of revenues coming from the type of accounts payable automation publicity we’re ideally searching for – FLEETCOR (20%) and WEX (10%). The remainder of the publicity comes from T&E-type expenditures which are sometimes among the many first finances gadgets which can be frozen when instances get robust, hiring being one other.

Nanalyze – October 2021

Have these percentages modified? It’s laborious to say taking a look at WEX’s newest quarterly deck, however we will ensure that “fleet options” isn’t a class we’re desirous about (Samsara looks as if a greater approach to get such publicity).

We would like publicity to the again workplace connectivity enterprise mannequin – a hub and spoke mannequin – which enjoys community results and scales over time to seize giant high-margin transaction quantity. As we stated in our earlier piece, the one approach to seize all of the attainable worth on this theme is to look previous the constraints of a SaaS mannequin and concentrate on firms which can be capturing a small proportion of the $125 trillion world funds quantity on the market, a good chunk of which is at present navigated utilizing Excel and paper by SMBs (Invoice is at present processing round $250B+ in annualized fee volume).

As for FLEETCOR, simply 23% of their revenues come from “Company Funds” whereas the remainder come from classes like Gas (40%), Lodging (13%), Tolls (11%), and Presents (6%). Intuitively, FLEETCOR noticed revenues plummet throughout the board when The Rona hit, presumably as a result of company journey was reigned in. Are you aware what different occasion causes company journey to shrink? That’s proper Little Johnny, a recession.

Some Considerations

Invoice’s latest quarterly earnings report noticed shares down over 25%, a document quantity, marking Invoice inventory’s worst-ever buying and selling day, which will be attributed to weak steerage calling for slowing progress within the coming quarter. Once you ignore the noise and take a look at the precise numbers, it’s laborious to imagine buyers would punish an organization for anticipating income progress over 50%.

Moreover, Invoice inventory noticed some stress throughout the latest Silicon Valley Financial institution collapse, as SVB is among the banks Invoice makes use of to course of funds. The corporate claims they promptly re-routed all funds and that there isn’t a damaging influence to Invoice’s operations. Nonetheless, the inventory nonetheless trades at ranges not seen since 3 years in the past, shortly after the corporate’s initial public offering (IPO).

It’s price including that of their most up-to-date quarter, the corporate paid out $191M in stock-based compensation, in comparison with income of $260M in the identical quarter. We lately wrote a chunk about stock-based compensation (SBC), and in it, we described a number of the downsides of the follow, resembling dilution: including extra slices to the pie, shrinking the items that shareholders already personal. Your common tech firm has SBC at round 20% of revenues, and Invoice appears to be nicely above that. Considerations about growing shares excellent could be considerably alleviated by the corporate’s latest announcement to purchase again $300 million in shares, a good suggestion contemplating their present valuation.

Shares excellent are additionally growing as a result of Invoice has been on a little bit of a procuring spree, nabbing up 3 firms within the span of 18 months. Whereas we wish to see market share being captured, we worry Invoice might encounter the Teladoc drawback: overpaying on acquisitions and being caught with a mountain of goodwill on the books that may ultimately be written off.

As of their final submitting, Invoice has $2.4 billion of goodwill on their books. Is that quite a bit? How lengthy is a chunk of string? One would possibly argue that issuing overpriced shares to accumulate different companies means it’s a wash.

We additionally wish to see firms with geographically diversified revenues. Invoice doesn’t verify that field, with 96% of their prospects being US-based. It’s a priority that’s additionally shared with our AvidXchange holding.

Are We Shopping for It?

So, if we solely put money into leaders, why are we lengthy AvidXChange (AVDX)? Effectively, earlier we stated we don’t put money into something with an SVR over 40. Once we went lengthy AvidXChange, Invoice was off the desk due to an SVR over 90. At this time, that’s an inexpensive seven. So, does this imply we’re all of a sudden going to dump AvidXChange and go lengthy Invoice? Not fairly. In the event you’re a long-time follower of Nanalyze, we solely promote a inventory for considered one of three causes: our thesis adjustments, income progress stalls, or the inventory exceeds 10% of our portfolio.

We’re presently within the pink on our AvidXchange place, and we final caught up with the corporate late final yr in a chunk titled AvidXchange Inventory Sees Robust Development in B2B Funds. We put money into firms, not shares. Whereas AvidXchange’s inventory has been hitting the skids, the corporate is motoring proper alongside. We can also’t ignore that two funds companies have been lately wolfed up by non-public fairness companies – Bottomline and Billtrust – which implies that’s a risk for AvidXchange. Positive, we all the time discourage speculating on M&A occasions, however couldn’t assist however word this.

Conclusion

To summarize, we’re not satisfied that locking in our AvidXchange losses to maneuver right into a Invoice.com place is sensible proper now. However when you’re somebody sitting on the sidelines, we don’t see any purpose why you wouldn’t take into account going lengthy Invoice.com.

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