BlackLine, Inc. (BL) is a unique player in the world of digital transformation, providing applications for the financial close process. The company offers eight individual solutions for the finance department, including “Balance Sheet Integrity, Close Process Management, Accounting Process Automation, Finance Transformation, Intercompany Hub, and Smart Close.”
While the pandemic initially had some impact on BlackLine’s business, revenue has slowly been recovering. In many cases, the pandemic has not dampened customer needs for transforming the labor-intensive financial close process and BlackLine is in a unique position to provide the software applications.
BlackLine stock has been falling since announcing Q2 results and it isn’t clear why. The stock price has dropped from a high of ~$93 to a recent ~$74.
(Source: Yahoo Finance/MS Paint)
The stock is now approaching support of around $70 and appears to be a good opportunity to pick up shares during this pullback.
The company performed above expectations last quarter, beating on both revenue and earnings. The poor market reaction may be a case of selling the news post-quarterly results after an outstanding quarter in a difficult economic environment. The other factor that may have been interpreted negatively was the announcement that CEO Therese Tucker will be stepping aside, and COO Marc Huffman taking over as the new CEO. This shuffle appears to have been in the works for some time and I don’t believe that the move of the CEO to a new role within the company should be interpreted that something is wrong.
Actuals versus Estimates
BlackLine has a history of beating analyst estimates by a significant amount and Q2 2020 was no different.
The ongoing exceptional performance relative to analyst estimates is a sign of conservative management.
For the full year, BlackLine management has guided for revenue of $335.5 to $338.5 million, approximately 15% higher than the $289 million revenue for 2019. The conservative outlook may have been a factor in the negative market action as investors likely interpreted conservative guidance as expected poor performance going forward. 15% revenue growth guidance is low for a company that has grown by more than 40% CAGR over the last 5 years.
But keep in mind that most companies have withdrawn guidance. The fact that BlackLine is providing guidance for double-digit revenue growth in this difficult environment is quite encouraging in my opinion.
The plot below illustrates how BlackLine stacks up against the other stocks on a relative basis based on forward EV/Sales versus forward revenue growth. Note: Please refer to a recent article for more information on the scatter plot relative valuation technique.
(Source: Portfolio123/private software)
BlackLine is sitting directly on the best-fit line on the scatter plot, suggesting that the stock is fairly valued on a relative basis relative to its peers.
A better valuation technique may be to look at the EV/Gross Profit estimate, substituting this figure for EV/Sales estimate in the above scatter plot. With an exceptional gross profit margin of 87%, BlackLine appears to actually be somewhat undervalued based on forward gross profits as opposed to forward sales.
(Source: Portfolio123/private software)
It seems unlikely that we will see a vaccine until at least the spring of 2021 and that depends on everything going well in Phase 3 trials for vaccine candidates. I am ignoring the apparent release/approval of the Russian vaccine as I don’t believe that it will be accepted by the western world. There is also some politics at play with President Trump announcing a vaccine approval for emergency use. It is difficult to take this seriously as the trials have not been completed. In my opinion, it will be at least a year before we see a return to some kind of normalcy.
In the meantime, the very generous handouts and stimulus are drying up and will not likely persist for much longer, certainly not past the November election. When the handouts stop, I expect that the stock market may become very bearish.
We are in the midst of a recession, if not a depression. Government employment statistics do not really capture the true extent of the state of the economy. BlackLine’s future performance along with most other stocks depends on economic recovery.
BlackLine did mention that its international operations underperformed US operations.
Our international business represented 25% of total revenue in Q2, up from 23% in the prior year. Despite this increase, the pace of growth slowed with the onset of the pandemic. Throughout Q2, international demand was not as strong as North America.”
This is an area to keep an eye out for in case a trend is developing.
Summary and Conclusions
BlackLine is a leader in digital transformation specifically with regards to the financial close process. Historically, financial close has been performed manually, is labor-intensive, and is ripe for transformation. While BlackLine has exhibited more than 40% annual revenue growth over the last 5 years, the growth has slowed down during the pandemic. In fact, it was “only” 20% YoY in Q2 2020. In my opinion, that level of performance is exceptional under the current circumstances. Revenue guidance for 2020 issued by company management is for 15% YoY growth. This may have been interpreted poorly by analysts that have been expecting better numbers. But keep in mind that BlackLine is actually providing guidance whereas most companies have withdrawn guidance completely. YoY growth of 15% is not too shabby in this difficult economic environment, especially when the management has a history of being conservative. I expect that growth will rebound once we emerge from the pandemic, hopefully within the next year.
Investors should really be focusing on the positive aspects of the company, such as the very good dollar-based retention of 108%, less churn than anticipated, and nearly 10% free cash flow margin. We don’t know when the pandemic will subside, and we don’t know how the recession will play out, although it may be very likely that it is long and deep. BlackLine has a strong balance sheet, and the likelihood of strong revenue growth post-pandemic makes it an ideal investment opportunity given the backdrop of bearish sentiment. I believe that BlackLine stock is fairly valued on a relative basis and investors should not miss out on this rare opportunity to invest in BlackLine at a depressed stock price.
Digital Transformation is a once-in-a-lifetime investment opportunity fueled by the need for businesses to convert to the new digital era or risk being left behind. And the pandemic has dramatically accelerated this paradigm shift. You can take advantage of this opportunity by subscribing to the Digital Transformation marketplace service.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.