Going long a stock with conviction helps you sleep well at night when your portfolio is dramatically underwater because the market hit the skids. The Nasdaq has fallen 30% since the beginning of this year when the market peaked and the bear market started its slide. This means your average tech stock would have fallen 30%. That may seem like a large drop, but it’s quite tame. With the last bull market having lasted nearly a decade, it’s safe to say many retail investors have never felt real pain in their portfolios.
To paraphrase Warren Buffet, don’t hold a stock you’ll feel uncomfortable holding when it loses half its value. That’s pretty much where we stand with AvidXchange (AVDX). A year ago, we published a piece on AvidXchange Stock: A B2B Payments Pure-Play which detailed a company using technology to save other companies money. The green bars below show the next four quarters of revenue growth for AvidXchange following our piece.
While AvidXchange talks about how the Rona had an impact on their business, it’s not visible in the above chart aside from a small dip in Q2-2020. That consistency is what attracted us to the stock in the first place. Today, we’ll check in on the broader growth picture, survivability metrics, and red flags we picked up on in our original analysis.
AvidXchange’s Growth Picture
While the quarterly revenue growth numbers speak for themselves, our focus is always on the bigger picture – annual growth. AvidXchange reports Q3-2022 revenues next week which should pave the way towards their 2022 guidance of $308 to $310 million, a number that’s now been raised for two quarters in a row. This latest guidance represents 24% growth on the lower end which exceeds their long-term target of achieving 20% growth per year.
One element of AvidXchange’s growth comes from expansion within their existing customer base. Around 95% of their new buyer customers are moving from paper payments to electronic payments for the very first time. These transitions take place over time, and AvidXchange estimates that 55% of their payments volume is still paper checks.
In discussing their competitive positioning, the company believes they’re largely competing against legacy paper payments. A key competitive advantage is that their platform has been purpose-built for medium-sized businesses (revenues between $5 million to $1 billion) across eight different industry verticals including real estate, construction, financial services, healthcare services, education, and media.
The media vertical was shored up with last year’s acquisition of FastPay. In the Q2-2022 earnings call, AvidXchange commented on how U.S. midterm and presidential election cycles have a significantly favorable impact on their revenues which speaks to the deep intertwinement of U.S. politics and media.
Both real estate and construction are among the top-performing verticals right now, and while the demand for new construction may be subsiding (top-line growth), that’s actually driving construction companies to look for operational efficiencies (bottom-line growth). This goes back to what we always say about investing in companies that save other companies money. In bear markets, searching for efficiencies becomes a priority in the face of stagnant growth. From our previous piece:
AvidXchange payment solutions target businesses with at least $5 million in annual revenues and/or at least 200 invoices or more than 100 payments per month. Back of the napkin math shows that the savings add up quickly. At 100 payments a month, and assuming the $19 cost mentioned earlier reduced by 60%, the net present value of AvidXchange’s solution is about $684,000 (that’s a perpetuity calculation using a 5% discount rate and 3% growth rate). That value proposition will sell itself during good times and bad.
AvidXchange’s Valuation and Survivability
In early 2020, AvidXchange was said to be valued at over $1 billion. Their IPO debuted one year ago at a valuation of nearly $5 billion, while today that’s dropped to $1.8 billion giving the company a simple valuation ratio of around five. That valuation is about average when compared to other fintech stocks in our disruptive tech stock catalog.
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For the first six months of this year, AvidXchange spent $50 million in cash on operations which implies a $100 million burn rate per year. With $363 million in cash on hand at the end of last quarter, the company has a runway of about 3.5 years before needing to raise more capital. Fortunately, they shouldn’t need to worry about that. The company expects to reach profitability in 2024 accompanied by a gross margin expansion to around 70% (last quarter came in around 63%).
A few red flags continue to persist for AvidXchange, mainly around partner and country risk. All the firm’s revenues come from the United States, and they don’t believe there’s any international expansion to be had from existing customers.
…if you look at across our eight different vertical markets, they’re not really markets that lend themselves to cross-border international payments.
Credit: Q2-2022 earnings call transcript
That’s probably because they’re targeting medium-sized businesses. With an estimated $20 billion total addressable market in the United States, it’s hard to see international payments becoming a priority for the firm. Given we’re in a bear market and AvidXchange’s growth persists, that’s some consolation single county risk should be less of a concern.
Regarding partner risk, AvidXchange makes the following statement regarding virtual credit card (VCC) providers from whom AvidXchange derives a substantial proportion of revenues.
A substantial portion of our revenue is derived from interchange fees earned on payment transactions processed from VCC service providers. Prior to 2022, our interchange fees were processed primarily through a single provider. To mitigate this concentration risk, we began processing a substantial portion of these transactions through a second provider during 2022. These two VCC providers together represented 66% and 59% of total revenues for the three and six months ended June 30, 2022, respectively.
In reading through the financial filings, we can only assume the “single provider” is MasterCard, an exclusive partner who also funded AvidXchange prior to their IPO. The second provider isn’t a name we’re privy to, and we don’t have any oblivious suspects. Can anyone guess who the second provider might be?
AvidXchange stock seems to be flying under the radar as investors focus more on the B2C payments niche. The most appealing value proposition of the AVDX platform is that it saves other companies money at a time when costs are being subjected to greater levels of scrutiny. Now that the dust has settled following their IPO, AvidXchange is a company we’d consider adding more shares of if we had remaining capital allocated to this position. If you’re thinking of going long or adding, waiting until after earnings is probably a good idea in case the company breaks their track record of good news.
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