Analysis

Why Did Bill Holdings Stock Fall 17% in May?

Investors were focused on slowing growth instead of Bill’s great quarterly report.

Bill Holdings (BILL 1.99%) shares dropped 16.5% last month, according to data from S&P Global Market Intelligence. The financial software provider delivered a stellar quarterly earnings report, but investors were distracted by some underlying data. The company’s outlook suggests that it will continue to experience slowing growth and net losses, which has the market feeling hesitant.

Strong quarterly results couldn’t keep investors happy

The month had a rocky start when Bill Holdings reported quarterly earnings on May 2. It delivered 19% revenue growth, which exceeded consensus analyst estimates for both sales and earnings. The company also topped its own internal forecasts for revenue and adjusted profits.

Image source: Getty Images.

Despite that positive traction, the stock slid lower after the financial report. Bill’s full-year outlook improved after its strong fiscal third quarter, but the fourth-quarter forecast suggests sales growth deceleration. Slowing growth has been an issue for the company amid macroeconomic pressures, and the stock has sunk as a result.

BILL Revenue (Quarterly YoY Growth) Chart

BILL Revenue (Quarterly YOY Growth) data by YCharts

Bill Holdings also reduced its full-year adjusted profit forecast. This was largely attributable to the company’s decision to apply an income tax assumption to their forecasts that wasn’t included in previous calculations. There also are concerns about an ongoing challenging small business environment. High interest rates and relatively weak economic growth threaten Bill’s customers. That’s not bullish for a company with slowing growth and some debt on its balance sheet. These issues only got worse when high-profile analysts revised their forecasts downward in reaction to the update, citing the ongoing pressures.

Bill’s valuation might be too cheap to ignore

There are some clear short-term challenges for Bill to overcome, but the negativity around the stock could create an opportunity for value hunters. The stock’s forward P/E ratio is 22. While its revenue growth rate might dip into the 10% range, its free cash flow is outpacing the top line significantly. With a price-to-cash-flow ratio under 20, another strong year could push that ratio toward 10 at the current stock price.

BILL PE Ratio (Forward) Chart

BILL P/E Ratio (Forward) data by YCharts

Bill Holdings has fallen out of favor, and the stock’s price reflects gloomy expectations from investors. Its recent tumble already assumes a big step back in financial performance, so this could be an opportunity to buy shares of a good company at a discount valuation.

Ryan Downie has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bill Holdings. The Motley Fool has a disclosure policy.

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