Over the past six months, BlackLine’s stock price fell to $56.82. Shareholders have lost 6% of their capital, which is disappointing considering the S&P 500 has climbed by 3.1%. This may have investors wondering how to approach the situation.
Is there a buying opportunity in BlackLine, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is BlackLine Not Exciting?
Even with the cheaper entry price, we're swiping left on BlackLine for now. Here are three reasons why you should be careful with BL and a 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 $159 million in Q1, and over the last four quarters, its year-on-year growth averaged 7.4%. This performance was underwhelming and suggests that increasing competition is causing challenges in acquiring/retaining customers. 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect BlackLine’s revenue to rise by 7.5%, a deceleration versus This projection is underwhelming and indicates its products and services will see some demand headwinds.
3. Shrinking Operating Margin
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 decreased by 2.1 percentage points over the last year. 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 3.1%.
Final Judgment
BlackLine isn’t a terrible business, but it doesn’t pass our quality test. After the recent drawdown, the stock trades at 5.2× forward price-to-sales (or $56.82 per share). Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're pretty confident there are superior stocks to buy right now. We’d suggest looking at one of our top digital advertising picks.
Stocks We Like More Than BlackLine
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