Description

Introduction

AvidXchange (AVDX) is a 2021 vintage IPO. A payment processing company that cos-plays as a SAAS business, AVDX has been a beneficiary of a rising interest rate environment, which has flattered their financial results over the last year. Despite the company’s best efforts to pass off this passive and potentially transitory benefit as a fundamental strength, an examination of its core performance reveals a slowing/mature business that is not deserving of a growth multiple. Aggressive insider sales in recent months bolster our opinion that AVDX’s prospects are less-than-rosy and our conviction in recommending a short position in the stock.

Summary Business Description

AVDX helps middle-market businesses manage their Accounts Payable (AP.) Their system aggregates invoices from vendors and service providers and allows the customer to deal with AP more efficiently. Vendors are essentially forced onto the system to get paid, which for the most part happens electronically. It is a perfectly fine business and AVDX earns money in three ways: a fee for the platform, a transaction fee, and interest earned on the float as working capital moves through its system. Managing AP is a fragmented and highly competitive industry, with companies like SAP, ORCL and BILL on the large end and a cornucopia of Web 2.0 companies requisite with fun spelling like Yooz and Tipalti on the smaller end. AvidXchange left a vowel out of their name because of course they did.

Short Case

AVDX trades at ~5x revenues, infinity times GAAP earnings, and 40x adjust EPS (w/ SBC making up more than half of adjusted EBIT.) Portraying itself as a maturing enterprise with mid-teens EBITDA margins simply will not do. So they throw around all the usual buzzwords like flywheel and net retention. But most importantly, they guide to 20% annual revenue growth. On the surface, they’ve pulled that off. Take a look at their quarterly performance since pre-IPO:

So on the surface, revenue growth is slowing, but still above 20%. Not bad! 

The company gives you several KPIs that are super helpful, such as the number of transactions processed and the breakdown of revenues from payments and software ($265MM vs. $112MM in 2023, respectively.) The crux of our short thesis is what they DO NOT give you. What they go out of their way to hope you will not notice, is float income. 

AVDX handles a great deal of cash on behalf of its customers, and there is a lag between collection and payment. The company holds these funds in (from their 10-K) “highly liquid, IG marketable securities…interest-bearing demand deposit accounts and CDs.” That’s fine. Nothing wrong with that. But the money they make from investing customer money is not core to their business. It’s not under their control. And it should be excluded from a proper evaluation of the fundamentals.

Here is where we take issue: the company does not disclose float income in the earnings release; does not mention it in their earnings calls unless specifically asked in Q&A; and only discloses it in their 10-K in the MD&A. This is in sharp contrast to BILL, their most directly comparable public company, which discloses float income as a line item in their financial results.

Why does it matter?

Because excluding float income, the results at AVDX look a whole lot different than what they discuss in their earnings calls and print in their presentations. Ex-float, revenue growth looks much different over the last 6 quarters:

As you can see, float income is flattering total revenue growth. What we find more concerning is the slowdown in every other key metric:

Transaction volume is slowing markedly...

As is revenue/transaction, when properly calculated ex-float income...

Revenue per transaction has not turned negative, which would be the true disaster scenario. But it’s not growing nearly as quickly as it was at IPO, and combined with single-digit transaction growth, expecting anything like 20% revenue growth on the core business seems beyond unreasonable.

Catalysts/Path

We see three ways that this short idea generates profit/alpha over the next 2 to 4 quarters. 

• Lower interest rates lead to decreased float income and reported revenue growth falls precipitously.

• Stable interest rates would mean no growth in float income, pressuring reported revenue growth.

• Continued deterioration in the core metrics of the business. One thing of note to watch on this front is that INTU recently (late 2023) introduced an AP feature embedded in their widely used QuickBooks platform. 

Conclusion

As mentioned previously, AVDX trades for ~5x revenue. If and when reported revenue growth plunges due to ongoing growth deterioration and decreased float revenue, we would expect that multiple to contract. Every turn in revenue growth equates to ~$2.50 in stock price. Pick your own adventure, but we would not be surprised to see a $5 stock over time.

Catalyst

Growth slowing

Lower rate

Stable rates