In my opinion, now has never been a better time to invest in “growth at a reasonable price” technology stocks. As the market continues to experience losses in the tech sector, investors should not reduce their allocation to tech stocks, but instead turn more towards small/mid cap tech stocks which have the opportunity to rebound on a valuation. front.
BlackLine (BL) is one of those under-the-radar names that deserves a second look. He briefly had his moment in the sun as a top-flight Wall Street favorite, but he’s seen steady declines as he gets older over the past year and his revenue growth has faltered in the mid-20s. Still, I sees BlackLine as a solid subscription software company that continues to expand its niche and potentially be an attractive takeover target.
From all-time highs above $150 hit about a year ago in February, BlackLine is down about 45%. And since the start of the November correction, BlackLine is down just over 30%. This is the perfect time to buy this dip.
BlackLine is classified as an ERP/financial software provider, but it does not directly compete with some of the mainstream financial suites like Workday (WDAY) or SAP (SAP). Instead, BlackLine is best known for its automation tools that help finance departments manage very specific activities, particularly the period-end financial close process.
Recently, BlackLine expanded its niche element by buying another niche financial software company: FourQ, a software company specializing in intra-corporate financial management. BlackLine paid $165 million upfront for the business, plus $75 million in potential earnouts. In a press release announcing the deal, BlackLine wrote:
FourQ technology complements existing BlackLine functionality by adding advanced tax capabilities and improving regulatory compliance in areas such as statutory reporting and transfer pricing. With FourQ, companies can better apply and optimize their global tax strategies. As a result, businesses can generate significant value by ensuring compliance with tax laws, including new e-invoicing mandates, optimizing effective tax rates and reducing exposure to currency risk to improve the fund of turnover and drive profitability. »
This is another example, in my opinion, of BlackLine extending its dominance into less crowded areas of enterprise software, which may make it attractive for a larger software holding company to acquire one day. Aside from the possibility of an acquisition, here’s a refresher on what I consider BlackLine’s key bullish drivers:
- Despite niche features, BlackLine is a true horizontal software product with high-performing customers across all industries. Financial services are prevalent across industries, and BlackLine’s customer base includes heavy manufacturing giants like Boeing (BA), energy companies like Chevron (CVX), other technology companies like Salesforce.com (CRM), and hotel names like Hyatt. The diversity of BlackLine’s customer base, as well as the recognition of its brand across all industries, is a major asset to this company’s expansion potential, particularly in the smaller mid-market businesses where its next stage of growth lies. opportunities for growth.
- Big Tam. Despite its positioning as a niche company, BlackLine estimates its addressable market at $28 billion, meaning the company’s current revenue rate of around $500 million is only a fraction penetrated. in this market opportunity.
- Rich margin profile. BlackLine has pro forma gross margins of around 80%, which tends towards the high end among software companies. This means almost every additional dollar of revenue will go into the bottom line.
- Free cash flow growth. BlackLine is now in an earnings expansion phase as it grows around 20%, and the company’s booming FCF profile may make it more attractive in this risk-averse market environment.
Additionally, BlackLine’s valuation hasn’t looked so modest in years. At the current share price near $87, BlackLine trades at a market capitalization of $5.10 billion. After offsetting $1.18 billion in cash and $1.10 billion in debt on BlackLine’s most recent balance sheet, the company’s bottom line the enterprise value is $5.02 billion.
Meanwhile, for the upcoming FY22 financial year, Wall Street analysts expect the company to generate $512.8 million in revenue. This puts BlackLine’s current valuation at 9.7x EV/FY22 revenue, against a historic multiple among young adolescents. BlackLine isn’t exactly a value stock yet, but the combination of its consistent 20+% revenue growth, free cash flow growth, and decent valuation make it a great balancing act. growth-profitability-value that can be very rewarding in today’s risky market.
Stay a long time here and buy the dip.
Now let’s take a closer look at BlackLine’s latest quarterly results, showing the consistency this company has been able to deliver for many consecutive quarters.
The third quarter revenue summary is shown below:
BlackLine’s revenue grew at a 21% YoY pace in the third quarter to $109.4m, beating Wall Street expectations of $107.1m (+19% YoY) with a significant margin of two points. Revenue growth has slowed somewhat from 23% year-on-year growth in the second quarter, but this is also due to a tightening in compensation from the early onset of the pandemic last year.
The company added 106 net new customers during the quarter, bringing the overall customer base to just over 3.7,000. On top of that, the company’s net revenue retention rate was 8%. , indicating an upselling trend within the installed base. Management notes that go-to-market performance has improved every quarter for the past five, and that its sales teams have noticed customers are adopting BlackLine solutions and modernizing their financial suites with “greater urgency” than before the pandemic. Amid these choppy markets for tech stocks, it’s important to remember that age-old trends toward data-driven decision-making and business process automation/efficiency continue to fuel record-breaking demand. software, and companies are allocating more and more budget dollars to it.
BlackLine is looking to continue to invest in its growth, and looking to 2022, there are three key strategic priorities for the business. According to remarks prepared by new CEO Marc Huffman on the third quarter earnings call:
As we seek to capitalize on these favorable market conditions, we are accelerating our investments in three key growth levers. First, we invest to increase customer engagement and success. For BlackLine, customer engagement is a fundamental tenet of our culture. Our customer engagement team includes over 100 experts who specialize in training and educating our customers to better leverage our platform […]
Second, we will continue to innovate and expand our platform. We have a clear vision to be the most indispensable platform for the controller, and we have invested in development resources to advance the functionality of our platform. We plan to introduce new products to the financial close and accounts receivable automation markets at our BeyondTheBlack event later this month. We remain on track with our migration to the cloud, and as we modernize the product stack, we can take advantage of increased agility and scalability as we move to Google Cloud. We are very excited about the expansion of our product portfolio, both from the point of view of organic development and business potential. […]
Our third area of investment is to develop our international presence. In each of the last three quarters, we have accelerated the rate of growth of our international revenue, but there are still significant advantages abroad. As it stands, our international presence is primarily in EMEA, with a small but growing presence in APAC.”
BlackLine also continued to generate a pro forma gross margin > 80%, among the highest in the software industry. And year-to-date, the company generated $41.0 million in free cash flow, representing a 13% FCF margin and 53% year-over-year growth.
Key points to remember
BlackLine remains an attractive and profitable mid-cap software company with both niche appeal and plenty of inroads for growth and expansion. In a context of turbulent markets, investing in high quality companies capable of balancing growth, profitability and value is a wise choice. Stay a long time here.