Forget PayPal: Billionaires Are Buying This Fintech Stock Instead

The market was finally encouraged PayPal (PYPL 1.46%) again. It shows progress under new leadership, and PayPal stock is up more than 15% over the past six months.

But several billionaires have piled into lesser-known fintech stocks Bill Holdings (BILL -0.77%). Bill is a younger company with a lot of growth on the horizon. Should you risk it?

Billionaires like Bill

Bill provides software-as-a-service financial solutions for small businesses. Its platform automates tasks like accounts payable and receivable and connects users to a large network of financial institutions. Customers love its technology, which frees up time from tedious tasks.

Some of the billionaires who have recently bought Bill stock include:

• Citadel Advisors’ Ken Griffin, who increased his position by 61%
• John Overdeck and David Siegel, formerly of Two Sigma Investments, who increased their position by 553%
• Steven Cohen of Point 72 Asset Management, who increased his position by 394%

More than billing

Bill’s growth rate has slowed sharply in the inflationary environment, but growth is still solid. Revenue rose 16% year over year in the fourth quarter of fiscal 2024 (ended June 30).

The company has 475,000 customer subscribers and 7.1 million network members, creating a network effect where its value increases as more members join the platform. It makes most of its money through payment processing, but subscription fees are a big part of its model. Subscription fee growth was sluggish due to inflationary pressure and eased in the fourth quarter, but higher transaction volume made up for the slack. The company also makes money through floating income, whereby it earns interest on money as it goes through transactions.

While waiting for business to pick up, invoice management works to reduce expenses and improve profitability. It has a gross margin of 81%, although that narrowed year-over-year in the fourth quarter. The operating loss narrowed from $41.4 million last year to $22.2 million this year.

The company should be well positioned to grow more efficiently when economic conditions improve and become sustainably profitable.

Better than PayPal?

Is Bill a better deal than PayPal? That probably depends on what kind of investor you are. PayPal is a value play, and while it hasn’t exactly been a stable investment in recent years, it’s moving in the right direction. It remains the industry leader in fintech and has millions of customers and merchant customers who rely on its tools. Bill, on the other hand, has expanded his network but is still building his name and presence.

As you would expect, PayPal is much cheaper than Bill and is also profitable. But at 4x trailing 12-month sales, Bill has a fair valuation for a growth stock and offers better opportunities for growth investors.

PYPL PS report data by YCharts

Analysts see it gaining more over the next 18 to 21 months — the average target for PayPal stock is an 11% gain today, but 26% for Bill.

Should you be like billionaires?

Bill has a tremendous market opportunity and platform that creates customer value. It continues to roll out improved features and attract new business.

However, it is struggling with profitability. It could be the environment, and when the economy improves, Bill will do better. It’s making the right moves to get there, but has yet to prove it can turn sales dollars into profit dollars. It has a very high gross margin, but that doesn’t trickle down to the bottom line.

Down the road, Bill could become more efficient and reward shareholders. But individual investors should only pursue billionaires in this position if they have a strong tolerance for risk.