BlackLine currently trades at $52.90 per share and has shown little upside over the past six months, posting a small loss of 2.3%. The stock also fell short of the S&P 500’s 11.5% gain during that period.
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Why Is BlackLine Not Exciting?
We're sitting this one out for now. Here are three reasons why BL doesn't excite us 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 $161.7 million in Q3, and over the last four quarters, its year-on-year growth averaged 7.2%. This performance was underwhelming and suggests that increasing competition is causing challenges in acquiring/retaining customers. 
2. Customer Churn Hurts Long-Term Outlook
One of the best parts about the software-as-a-service business model (and a reason why they trade at high valuation multiples) is that customers typically spend more on a company’s products and services over time.
BlackLine’s net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 103% in Q3. This means BlackLine would’ve grown its revenue by 3.3% even if it didn’t win any new customers over the last 12 months.
BlackLine has an adequate net retention rate, showing us that it generally keeps customers but lags behind the best SaaS businesses, which routinely post net retention rates of 120%+.
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 metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.
Analyzing the trend in its profitability, BlackLine’s operating margin might 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 3.6%.
Final Judgment
BlackLine isn’t a terrible business, but it doesn’t pass our bar. With its shares lagging the market recently, the stock trades at 4.7× forward price-to-sales (or $52.90 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better investments elsewhere. We’d suggest looking at a top digital advertising platform riding the creator economy.
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