What a brutal six months it’s been for BlackLine. The stock has dropped 53.7% and now trades at $26.79, rattling many shareholders. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
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Why Do We Think BlackLine Will Underperform?
Despite the more favorable entry price, we’re cautious about BlackLine. Here are three reasons we avoid 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 $173.7 million in Q1, and over the last four quarters, its year-on-year growth averaged 8.5%. 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
While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain 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 3.9%.
Final Judgment
BlackLine falls short of our quality standards. Following the recent decline, the stock trades at 2.5× forward price-to-sales (or $26.79 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are more exciting stocks to buy at the moment. We’d suggest looking at a dominant aerospace business that has perfected its M&A strategy.
Stocks We Would Buy Instead of BlackLine
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