BILL’s 19.2% return over the past six months has outpaced the S&P 500 by 5.9%, and its stock price has climbed to $54.10 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

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Why Is BILL Not Exciting?

We’re glad investors have benefited from the price increase, but we're cautious about BILL. Here are three reasons we avoid BILL and a stock we'd rather own.

1. Weak Billings Point to Soft Demand

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

BILL’s billings came in at $394.1 million in Q3, and over the last four quarters, its year-on-year growth averaged 11.9%. This performance was underwhelming and suggests that increasing competition is causing challenges in acquiring/retaining customers.

2. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect BILL’s revenue to rise by 10.5%, a deceleration versus its 54.8% annualized growth for the past five years. This projection is underwhelming and indicates its products and services will see some demand headwinds.

3. Operating Margin Rising, Profits Up

While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.

Over the last two years, BILL’s expanding sales gave it operating leverage as its margin rose by 3.1 percentage points. Its operating margin for the trailing 12 months was negative 6.2%, and it must keep making strides to one day reach sustainable profitability.

Final Judgment

BILL isn’t a terrible business, but it doesn’t pass our quality test. With its shares topping the market in recent months, the stock trades at 3.4× forward price-to-sales (or $54.10 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere. We’d suggest looking at the most entrenched endpoint security platform on the market.

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