TRADE ALERT: Sell BILL (Please Read)
I made a mistake with BILL; expected growth and free cash flow trends didn’t materialize, so I recommend selling and moving on.
Executive Summary
I made a bad mistake. Sell BILL (BILL)
Post-mortem, after the fact, analysis
Investment Thesis
Bill (BILL) was a turnaround opportunity. I thought that I was getting the business cheap, as it was on the cusp of moving towards a new narrative, that would see the business steadily move towards 20% topline growth.
What's more, as always, I had expected the free cash flow to moving higher, which would continue to propel the stock higher.
In short, as I wrote in my previous analysis, this is what I was looking for:
This hasn't turned out to be the case. I made a mistake, and now, I recommend that we exit this investment.
Please Read
I made a mistake in recommending BILL to you. Out of a portfolio of approximately 20 stocks, every so often, there's going to be a bad stock. My job is to discern what's an opportunity worth savings versus where I can best deploy that capital.
I know that I can easily find better opportunities than BILL. The easy option for me today is to ease your pain. To say, ''The market got it wrong, buy the dip''. But that sort of bravado statement are not constructive. Plus, they are also a complete waste of my capital and yours.
My job is to deliver outperformance in 2025. That's my number one task. It's not to lament poor decisions.
I recommend that we salvage whatever capital we can now. Park it as cash, and look towards the next opportunity.
I know that my decision isn't going to resonate with some of you. But I can't let my yearning for popularity stop me from making the required difficult decisions.
What About Stop Losses, For Future Bad Earnings?
I've been investing for a long time. In my experience, while the occasional sell-off happens, and is undoubtedly frustrating, I can tell you without any doubt, that there are times when the market sell-offs after hours post earnings, and it's just algo's volatility.
And once the waters have calmed in the next few minutes, the stock gets bid back up.
I never use a stop loss. And I passionately urge that you don't either.
Let's move on.
Bill's Near-Term Prospects
BILL Holdings helps small and mid-sized businesses make their financial operations way simpler and more efficient. Think of it like giving them a powerful digital assistant that handles paying bills and tracking payments, all on one platform.
Instead of dealing with outdated processes, businesses can automate tasks and focus more on growing their operations. Customers love it because it saves time and cuts down on headaches. Plus, with AI built right in, BILL makes things like matching payments and organizing transactions smoother and faster.
And yet, the issue here is that for the next quarter, BILL is predicting core revenue growth of around 13% to 15%, which is a bit lower than last quarter's 16%. They say it's just a timing thing, with growth shifting slightly between Q3 and Q4, but this sort of negative surprise isn't what investors want to pay up, particularly when this was already a turnaround company.
Revenue Growth Rates Fail to Stabilize
Allow me to put forward the context. Back in fiscal Q4 2024, two quarters ago, this is what management said during the earnings call:
Then, last quarter, when asked point black whether or not BILL was sticking to their plan of 20% topline growth, this is what management said:
I believed that BILL would be able to stabilize and deliver some acceleration on its revenue line. Even if this appears to be the case for fiscal Q4 2025, the next quarter's guidance is decidedly moving in the wrong direction. There's no question about that.
On top of that, I wouldn't be surprised if when BILL guides next quarter, for fiscal Q4 2025, if they don't lower their guidance for fiscal Q4, given that the company is clearly struggling to deliver the sort of growth rates that I previously intended to.
With this in mind, let's discuss its valuation.
BILL Stock Valuation -- 23x Forward Free Cash Flow
BILL holds about $500 million of net cash. This is puts its net cash at 7% of its market cap (inclusive of the after hours sell-off), a rather attractive amount of cash.
In my previous analysis I said:
On the one hand, I still believe that this is going to be the right sort of ball park. But what complicates matters here is that despite growing its topline by 14% y/y, BILL free cash flow was actually moved in the opposite direction, see below:
My thesis was that I was leaving myself room for error, but I wanted to see the free cash flow moving steadily higher each quarter. And that's sadly not the case.
As an Inflection investor, my north star is the future free cash flow of the business. This for my style of investing is the holy grail. There's a lot of noise in the market, but I've found that following the increasing free cash flow of a business works well, and is a highly reproducible strategy.
If the core tenet of my strategy isn't pointing in the right direction, this is a clear signal to move away from that investment.
The Bottom Line
I made a mistake with BILL, plain and simple.
The growth I expected didn’t materialize, and free cash flow trends didn’t pan out as hoped.
Rather than stubbornly holding on, I’m cutting my losses and moving on. Investing is about learning and focusing on better opportunities, and that’s exactly what I’m doing next.
First rate analysis, clear and convincing. The hardest call to make is the one in which you reverse a strongly held opinion. You did exactly that, and quickly. It would have been much easier to rationalize but the facts did not justify that and you faced those facts squarely. I salute you, sir!