Bill.com Holdings: QuickBooks Flips From Asset To Serious Threat: 40%+ Downside

Bill.com Holdings (NYSE:BILL) is a fantastic short opportunity in my opinion as QuickBooks/Intuit is already in the process of disrupting their business model. Investors are likely not pricing this in because they have heard management ascribe the lack of growth to the economy.

I believe this process will continue for the foreseeable future as Intuit begins to directly compete with BILL, and broad based insider selling began last week.

Company History

Bill released its first product in 2008. As the S-1 indicates the core of the company from the beginning has been built on partnerships with important players in the small business finance space, including large consumer banks, and most importantly Intuit. CEO Rene Lacerte has a deep connection to Intuit as he started working at Intuit in 1994, his relatives sold a company to Intuit for $400m in 1998 and he sold a company to Intuit for $170m in 2009. The Intuit partnership is likely the largest driver of consumer adoption for BILL. And the fact that it is changing from an asset to an enormous threat is causing a decline in standalone BILL makes sense.

BILL IPO’d at a valuation of ~$2b in late 2019, immediately before the pandemic. In 2021 Bill bought Divvy for $2.5 Billion, 75% of it in BILL stock.

Overall I believe there is no strong historical basis supporting the current valuation of $9.6 billion, especially if BILL is now on the wrong side of Intuit.

QuickBooks Dominates BILL’s Industry

QuickBooks' US market share is likely >60%, (many additional sources, 1, 2, 3, say much higher) and has broad industry power in addition to market share, evidenced by its large price increases recently. QuickBooks revenue was up 27% y/y in the recent quarter.

BILL’s customers are more likely than average to be QuickBooks customers because QuickBooks is/was a large customer acquisition channel for them. (Bill.com is an app in the QuickBooks app store in addition to other channels.)

In short, QuickBooks dominates BILL’s space and BILL needs to be on the right side of it to succeed. Accordingly, BILL mentioned both Intuit/QuickBooks many times in their S-1 and has continued to. Up until mid/late 2022 BILL was on the right side as QuickBooks was the most important customer acquisition channel for Bill, but all that is starting to flip.

QuickBooks: Biggest Positive To Biggest Negative

QuickBooks has decided to compete with BILL’s core bill pay product, and since well over 50% of BILL’s customers use QuickBooks, this is likely to be devastating for BILL. This is happening in several phases. The only phase complete so far is the QuickBooks Business Network. This is a product that is almost like a social network for small businesses, and while it is likely causing some drag on BILL, there should be significant additional losses as QuickBooks builds out its own payment function.

On last week's quarterly call, Intuit CEO Sasan Goodarzi stated:

We launched the business network last quarter to millions of our QuickBooks customers. That is a big opportunity, of course, very low -- no penetration, because we didn't have it before, and it's 70% checks. So that's a big one.

And then part of that is also just bill pay capabilities, which we've had on our platform through a couple of really strong partners. And now we're building that capability ourselves, because we believe that it can deliver a far seamless experience for our customers.

This means that the disruption from the business network is still ongoing and will likely continue to play out over the next several quarters or years, and the disruption from the bill pay capabilities likely will begin to play out sometime this summer or later. So there are multiple additional competitive threats to the core BILL product that have yet to play out.

Importantly, BILL SEC filings, including the 2021 10-K had consistently noted a contract with Intuit ending in June 2023.

Our platform is integrated into Intuit’s QuickBooks product, which millions of SMBs rely on for accounting services. ... Our agreement with Intuit will terminate on June 26, 2023, unless earlier terminated in accordance with the agreement. ... Intuit has integrated another third-party bill pay solution into its QuickBooks product. Further, Intuit may seek to develop a solution of its own, acquire a solution to compete with ours, or decide to partner with other competing applications, any of which its SMB customers may select over ours.

This was removed from the 2022 10-K, likely indicating that it is no longer a risk because it is a reality. If this uncertainty had been resolved in BILL's favor, it would likely be emphasized on the 10-K it and Intuit management would probably not be specifically saying they are building out their own bill pay functionality.

Alternative Data

Alternative data which can be viewed with a free trial, from 42matters shows declining downloads of both the iOS app and the Google Play app, with mostly negative month over month performance since September.

Additional Competition For BILL Core

There are also competitors that offer many of the services that BILL offers for free, including Melio. BILL is actually essentially a legacy player at this point, and Melio's lower price is compelling. Intuit has actually invested directly in Melio and is using Melio to power part of their services that are disrupting BILL. There is also Tipalti and many other competitors, a google search will reveal many VC funded startups paying for ad space.

Divvy

The only reason that BILL forward revenue estimates are not starkly negative is that Divvy is growing so fast. While Divvy will probably continue growing for more than a year, Divvy faces a lot of competition from companies that are VC funded and with higher valuations, for example Brex. There is not a large moat in the payment management space and it would be very surprising to me if BILL is able to make Divvy highly valuable. The Divvy founder is no longer with BILL.

Base Case

BILL currently has enterprise value over $8 billion vs ~$895m of core forward revenue, which may be aggressive. Assuming management’s guidance is accurate, BILL should probably trade closer to 5x core revenue (it should probably be less), for an enterprise value of 4.5 billion which would put the stock below $52.

Upside Case

The worst upside case is that Intuit completely changes their plan and decides to buy BILL. This seems unlikely because of BILL's high valuation and Intuit's stated plan to build their own capabilities. I think it's unlikely that anyone else will buy BILL because they are in many ways under Intuit's thumb.

In a more moderate upside case the loss of QuickBooks is not as bad as feared, and the company is able to resume growing revenues at say 25% per year overall, despite the substantial competitive headwinds in the space. In this case the stock is probably fairly valued for another year at least, and then maybe resumes moving upwards at 15% per year after that. But the high valuation of BILL does leave some room for the stock to catch up to its current valuation even if they do resume growing more than I imagine.

Downside Case

In a downside case, the impact to BILL from Intuit’s actions has yet to be fully felt, and BILL management has overestimated 2023 revenue and/or 2024 revenue is lower than 2023 revenue. This seems very possible because QuickBooks is absolutely the most important factor in BILL’s space and QuickBooks switching from a promoter to a competitor has the potential to be totally devastating. In this case the market will essentially assume that BILL falls further and further behind the competition and will never be profitable, and the stock is valued something along the line of 2x net cash, or just over $3 billion, which would be close to $30 per share.

Conclusion

BILL may be a permanently post growth company. They face fierce competition in all of their businesses and are on the wrong side of Intuit, the most important player in the space.

BILL management has stated that the disappearance of growth is due to the economy and not mentioned another reason. For example there was no discussion of QuickBooks on the recent quarterly call and no discussion in this subsequent CNBC interview. In my opinion, investors may not be getting the complete picture from management's statement.

The stock is only down about 20% since the zero growth guidance, which is creating a strong reason to sell the stock because as an unprofitable company with enormous competition both from Intuit and from VC funded startups the growth story appears broken.

While I believe anyone with a long position in BILL should sell, I personally have shorted calls in the stock. Shorting stock or calls is risky, and should be considered in small size and cautiously.

I believe shorting calls is attractive because implied volatility is relatively high, and I have no immediate term catalyst that would create a large move.

However I do expect the stock to drift down over the next several months as the market begins to realize that BILL has largely built up its business on the shoulder of Intuit, and now Intuit has decided to compete with them with the QuickBooks Business Network, Melio's Bill Pay functionality, and their own internal Bill Pay functionality that they stated they were building on last week's call. No less than five BILL insiders each sold over $100k of stock last week as well.