BL Stock: Is BlackLine’s Top Line Set to Grow?

Introduction

BlackLine [BL] is an enterprise software company specializing in cloud-based solutions for automating and streamlining financial close, accounting and compliance processes. 

Its software is designed to help organizations improve accuracy, reduce manual workload and boost transparency. It supports finance and accounting teams in ensuring regulatory compliance and increasing efficiency across workflows.

BlackLine’s revenue growth has been lackluster over recent quarters, and Wall Street analysts forecast it falling behind its competitors on this front. Here, we will explore the reasons why this might be the case, and examine BlackLine’s fundamentals to explain the bull and bear cases for this stock. 

BlackLine Flatline

Any company in the software-as-a-service (SaaS) business has to have one eye on net revenue retention (NRR). This metric factors in renewals, upgrades, downgrades and cancellations among its subscribing customers over any given period, and calculates the percentage of recurring revenue that has been retained from one period to the next.

In BlackLine’s case, NRR hit a relatively sluggish 104% in Q2 2024, down from 106% in the same quarter the previous year. CFO Mark Partin attributed this to “a lower velocity of account growth and slightly higher customer churn”. 

High churn and low NRR growth like this are a concern for a SaaS company — particularly one trading at almost 63 times trailing earnings — because its business model makes it easy for companies to cancel when their subscriptions expire. Elevated churn can lead to an exodus if it is not matched by account growth, and BlackLine is edging closer to the point at which its recurring revenue will be falling year-over-year. 

Recent Stock Performance

Investors have taken note of this trend. BlackLine’s share price has fallen 10.11% in the year to date, although it has gained 14.55% over the past 12 months. 

However, in terms of BlackLine’s most recent earnings release, the company’s performance appears to be improving. Despite the sluggish revenue growth, the company flipped from a $0.41 per-share loss to a $0.58 per-share profit, beating analyst expectations of $0.50.

BlackLine’s stock gained 11.88% on August 7 following this positive earnings release. With Q3 results expected after markets close on November 7, investors will look to see whether it can buck the lackluster NRR trend and/or continue the positivity with regard to profits. 

Crunching the Numbers

Automated accounting software is a relatively small but growing field. While diversified technology companies like Oracle [ORCL] and IBM [IBM] develop competitor solutions, investors considering allocating to a specialist in the space have three main options: BlackLine, OneStream [OS] and Workday [WDAY].

Source: Yahoo Finance

A potential red flag with BlackLine is its relatively low expected revenue growth compared to its two closest competitors. While it boasts the lowest P/S ratio, this relatively low growth expectation could be a sign that BlackLine is a value trap; its revenue is considerably lower than Workday’s and analysts expect this gap to widen, while OneStream’s could overtake it if it continues to grow at double the pace.

BlackLine Stock: The Investment Case

The Bull Case for BlackLine

However, there is an argument that BlackLine’s strong margins could compensate for its relatively sluggish revenue growth.

Morgan Stanley analyst Chris Quintero raised his price target for BlackLine on September 30, citing its “underappreciated” margins.

“We believe management will revise their margin targets up at Investor Day on November 19 given the company’s lower growth profile today compared to when the targets were given in 2022 and the company already either operating above or closely approaching those targets,” Quintero said in a note.

He raised his price target from $60 to $70, implying a 24.7% upside. The high target among analysts polled by LSEG, of $81, implies 44.3% gains.

The Bear Case for BlackLine

However, there are reasons to believe that BlackLine’s sluggish growth could be hard to overcome — and that even a positive margin story might be insufficient.

BlackLine’s software is specifically designed for the period-end phase of accounting, Seeking Alpha analyst Gary Alexander wrote in September. Competitors such as Workday, Oracle and SAP [SAP] offer much more comprehensive solutions, and accountancy teams might favor these for the sake of using fully integrated systems across their processes. 

On a possibly related note, BlackLine’s customer retention has been weak — though Alexander notes that this is not unusual in this industry. Of greater concern to him is the company’s pivot away from large enterprise customers and towards mid-sized businesses. “This may subject the company to more macroeconomy volatility as smaller businesses have a higher risk for churn,” he wrote.

Analysts in general share Alexander’s pessimistic view. The median price target of $54.00 implies a 3.8% decline over the next 12 months, while the low target of $46.00 implies a fall of 18.0%.

Conclusion

While there is no guarantee as to the accuracy of any analyst forecast — whether for share prices or performance metrics such as revenue — the consensus at present appears to be that BlackLine will struggle to grow over coming years.

Investors might consider these downbeat expectations to have created a buying opportunity. However, they should consider the risks involved in investing in the stock before taking any decision.

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