Bill.com (BILL, Financial) experiences continued negative sentiment following a downgrade to "Underweight" from "Equal Weight" by Wells Fargo, marking the second such adjustment in two months. This reflects growing skepticism about the financial automation software provider's immediate prospects for a turnaround, especially for small and medium-sized businesses (SMBs).
The struggle for BILL to rebound has been notable since late 2021, facing a prolonged period of low demand from its core SMB market. Despite a cautious macroeconomic landscape causing hesitancy in digital transformation investments, the shift towards digital payments in an underpenetrated market suggests potential long-term growth reminiscent of pandemic levels.
- Despite cautious spending by SMBs, BILL's revenue growth remains robust, with expectations to grow by approximately 17% year-over-year in FY24, reaching between $1.226 and $1.251 billion.
- The company, having surged from around $150 million in annual sales pre-pandemic to over $1 billion by FY23, still sees significant growth potential in the SMB sector, with about 6 million U.S. SMBs yet to adopt its services.
- Moving from paper checks to digital payments presents a cost-saving opportunity for SMBs, especially in an inflationary environment where cost-cutting options are limited.
- Despite a dip in top-line growth, BILL has improved its profitability through aggressive cost management, including a 15% workforce reduction, leading to a notable increase in adjusted EPS from $0.14 in 1Q23 to $0.63 in Q2 (Dec).
Converting SMBs from paper to digital payments may be more challenging than anticipated by BILL, given the uncertain economic outlook and a fragmented industry. However, the stock's over 40% decline in the past six months may have already accounted for many near-term challenges. Potential interest rate reductions by the Federal Reserve and advancements in AI could offer additional support for BILL moving forward.
