Over the past six months, BlackLine’s shares (currently trading at $32.29) have posted a disappointing 11.7% loss, well below the S&P 500’s 12% gain. This might have investors contemplating their next move.
Is there a buying opportunity in BlackLine, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think BlackLine Will Underperform?
Despite the more favorable entry price, we’re sitting this one out for now. Here are three reasons you should be careful with BL, plus one 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.
BlackLine’s billings came in at $193 million in Q2, and over the last four quarters, its year-on-year growth averaged 7.3%. This performance was underwhelming and suggests that increasing competition is causing challenges in acquiring/retaining customers. 
2. Long Payback Periods Delay Returns
The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.
BlackLine’s recent customer acquisition efforts haven’t yielded returns as its CAC payback period was negative this quarter, meaning its incremental sales and marketing investments outpaced its revenue. The company’s inefficiency indicates it operates in a highly competitive environment where there is little differentiation between BlackLine’s products and its peers.
3. Operating Margin in Limbo
Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.
Analyzing the trend in its profitability, BlackLine’s operating margin might have fluctuated slightly but has generally stayed the same over the last two years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its operating margin for the trailing 12 months was 4.3%.
Final Judgment
BlackLine doesn’t pass our quality test. Following the recent decline, the stock trades at 2.7× forward price-to-sales (or $32.29 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better investments elsewhere. We’d suggest looking at the Amazon and PayPal of Latin America.
Stocks We Would Buy Instead of BlackLine
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