At face value, it looks like the stock market is having a great year in 2023 because the benchmark S&P 500 index is up by more than 15%. But most of that gain is attributable to a small group of big tech stocks called the “Magnificent Seven.”
The rest of the market is lagging behind. The S&P 500 Equal Weight index levels the playing field by giving each stock in the S&P 500 the same representation, regardless of its market capitalization. That index is down 0.4% for the year.
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In that light, it shouldn’t be surprising that a number of quality individual stocks are trading in the red at the moment, and Bill Holdings (NYSE: BILL) is one of them. The company, which changed its name from Bill.com earlier this year, just reported its financial results for its fiscal 2024 first quarter (ended Sept. 30), and traders sent its stock plunging by 25%. It’s now down by about 48% year to date.
But that actually presents an opportunity for long-term investors. If you’re sitting on idle cash that you don’t need for immediate expenses, you might want to consider allocating $500 to Bill stock and holding onto it for 10 years or more.
Bill serves a critical need for small businesses
Running a small business can involve long hours and a working knowledge of sales, manufacturing, banking, bookkeeping, accounting, and property management (among other things). Due to limited resources, small business operators often can’t outsource all of those tasks. But the rise of affordable software solutions is putting time and money back into their pockets.
Bill’s flagship product is a cloud-based digital inbox where businesses can receive, upload, and store all of their incoming invoices. From there, they can pay them with a single click, and the platform automatically logs the transactions with the operator’s choice of bookkeeping software. No more messy paper trails.
In 2021, Bill also acquired two other companies: Invoice2go, which allows businesses to quickly generate invoices for customers and track incoming payments, and Divvy, which is a budgeting and expense-management platform.
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Bill serves 471,200 business customers across the three core products. Its growing ecosystem is accelerated through partnerships with more than 7,000 accounting firms, which recommend Bill’s software to their business clients because it makes their financials much easier to track.
Solid quarterly results, disappointing guidance
Bill generated $305 million in revenue during its fiscal first quarter, which was an increase of 33% year over year. It was also above the company’s forecast of $297 million. While that was great news, management’s outlook was a big disappointment for investors.
At the close of fiscal 2023 (ended June 30), Bill said it expected to generate as much as $1.306 billion in revenue its fiscal 2024. But after Q1, it revised that number down by $61 million to $1.245 billion. That would equate to growth of just 18%, which means the company anticipates a notable deceleration in growth as fiscal 2024 progresses.
There were two reasons behind the reduced forecast. First, inflation and rising interest rates have forced businesses to manage their costs more carefully, which directly affects Bill. It generates most of its revenue through fees each time a customer executes a transaction on its platform, so if they are spending less, the company makes less money.
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Second, Bill is carefully managing its own expenses. Its single largest operating cost is marketing — which helps to drive revenue growth — and the company held that line item flat during fiscal Q1.
But that does come with a silver lining. Bill reported a net loss of just $27.8 million during the quarter, which was a 65% smaller outflow than the $81.6 million net loss it delivered in the year-ago period.
Simply put, the company is trading rapid growth and bigger losses for steady growth and potential profitability, which should make it a more sustainable business in the long run.
A great buy-and-hold stock
The current weakness in the broader economic environment won’t last forever. Inflation has declined substantially during the past 12 months, and experts are already predicting the Federal Reserve will cut benchmark interest rates three times in 2024. Plus, when Bill senses optimism among the small business community, it could reignite its revenue growth by investing more money in sales and marketing.
But longer term, the company is chasing an addressable market that includes over 70 million small and mid-sized businesses around the world. Those businesses complete a whopping $125 trillion worth of transactions each year.
Considering the company only serves 471,200 businesses right now, and processed just $271 billion in payment volume during the last 12 months, it has barely scratched the surface of its opportunity.
That’s why I think the latest sell-off in Bill Holdings stock after its latest quarterly report might present a golden opportunity for investors with a long-term outlook.
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