It’s been a volatile start to the year for the Nasdaq Composite, given that the index started the year up by more than 10% before briefly falling into negative territory for the year in early March. This volatility has taken an outsized toll on growth stocks and many software names, with multiple Nasdaq constituents staring down (-) 20% returns as we begin Q2. Fortunately, this pullback has allowed valuations to improve for some tech names, which looks to be creating a buying opportunity for hyper-growth names with strong business models. In this update, we’ll look at two stocks with a significant lead in their respective industries that are now trading at more reasonable valuations.
Amazon.com (AMZN) and Bill.com (BILL) have very little in common, with one being a mature online retailer & tech company and the other being a large-cap tech company in the software space. However, both companies do share two key traits: exceptional growth & improving earnings trends. In AMZN’s case, the company just came off a massive year with annual EPS growth of 81%, and in Bill.com’s case, the stock is not yet profitable but had a huge year with revenue growing by 45% despite a challenging year for small businesses due to COVID-19. In fact, both companies flourished in FY2020 while many other names were losing market share, and each company’s ability to adapt and maintain their lead on market share suggests that they have significant growth ahead in the coming years, and their respective growth stories are nowhere near over yet. Let’s take a closer look below:
(Source: Company Presentation)
Beginning with Bill.com, the company had an impressive FY2020 with annual revenue growing to $158 million, and the company just coming off a quarter where it reported revenue of $54MM, up 38% year-over-year. This has placed the company in a position to generate revenue of more than $220MM in FY2021, translating to roughly 40% growth year-over-year after lapping a year of 45% growth. While this is a minor deceleration, it’s incredible when we consider that the company is maintaining its strong double-digit growth rates as it matures. So, while Bill.com might look expensive at nearly 40x trailing sales at a market cap above $12BB, it’s important to note that the growth story here is massive, as highlighted by Bill.com. In fact, the company’s ~109,000 customers represent only a fraction of what the company believes its TAM is.
(Source: YCharts.com, Author’s Chart)
This is because Bill.com has not even begun to scratch the surface internationally, has seen only minimal adoption among its existing customers, and estimates that there are 6BB small business employers in the US alone, with projected average revenue per user [ARPU] of $1,500 per year. Assuming the company even picked up a fraction of this market or 1MM customers, we could see Bill.com’s revenue soar to…
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