I recommend buying AvidXchange (NASDAQ:AVDX). AVDX specializes in providing AP software and payment solutions targeted at middle-market businesses. COVID-19 has hyped the demand for flexible, cloud-based solutions for organizations. AVDX is undeniably well-positioned in the market, with its in-demand solution digitizing the entire AP process. In FY25, AVDX should be worth $11.17 with revenue of $544 million, assuming it trades at the same forward revenue multiple as it does today.
AVDX is a SaaS company that specializes in providing automated accounts payable [AP] software and payment solutions to middle-market companies and their suppliers.
Industry is large and growing
Business-to-business (B2B) payments are more complicated than consumer payments since they revolve around the purchase order or invoice and include integrated accounting systems. These require stringent payment approval processes, with payments typically being initiated within and across several different accounting systems. Approximately 40% of B2B payments in the United States are still made with paper checks, which typically require some type of manual involvement and take time and resources to address. Due to the high labor costs and direct costs of these manual operations, not being able to digitize and automate these workflows creates a lot of problems and wastes a lot of time.
In particular, I believe the need for financial software solutions for the middle market and its suppliers has been grossly neglected. While there are a small number of providers catering to both major enterprises and small and medium-sized organizations, the market for enterprise resource planning [ERP] and software solutions catering to the middle market is extremely fragmented. Due to this fragmentation, the middle market now has hundreds of different accounting systems to choose from.
When we keep an eye on the middle market, we can see different challenges for these companies. There are a wide variety of vertical and sub-industry accounting systems and integrations in the middle market, each with its own set of sophisticated and highly particular business, accounting, and compliance requirements. Moreover, the middle market bears a disproportionate share of the administrative costs associated with these intricate AP processes. Cloud-based AP automation and B2B payment solutions are the only way for these companies to save a lot of money and work more efficiently, which they need to do in order to stay competitive.
COVID is a blessing in disguise?
The COVID-19 pandemic emphasized and accelerated the demand for flexible, cloud-based solutions that can be used at any time and from any location. When companies began relying more heavily on remote workers and the U.S. postal service experienced disruptions, the importance of business continuity became even more apparent. No matter what happens in the outside world, a company must be able to keep receiving bills, making payments, and running operations normally. So, digital solutions offer an alternative that is more secure, reliable, and flexible than manual processes that have been used for a long time.
Purpose-built solution that digitizes the entire AP process
AVDX was established with the middle market in mind. The AVDX platform solves problems that are typically encountered by large corporations, but it does so on a mid-market scale, with a mid-market budget, and in a middle-market language. In contrast to other tools that require buyers to first ingest their invoices, AVDX takes ownership of and improves upon every stage of the value chain to provide a superior customer experience for buyers. AVDX’s platform will accept paper or digital invoices and replicate that ownership and automation for payment.
Strong flywheel effect
On top of being purpose-built, paper can be eliminated, procedures can be streamlined, and quick and correct reconciliation can be guaranteed with AVDX’s comprehensive solution. I believe the company has indeed spent a long time developing a software and payments platform with hundreds of integrations to niche accounting and information systems aimed at the middle market.
In essence, AVDX offers a foundational layer of infrastructure to facilitate transactions between its buyers and sellers. The company’s growth is driven by a flywheel effect that is fueled by the increasing number of connections between buyers and suppliers as a result of buyers approving and paying invoices through the platform. This strong cycle has helped AVDX build up a large pool of suppliers. This means that when a new buyer signs up for the service, AvidXchange can start collecting payments almost right away.
The flywheel effect also generates a significant amount of data for AVDX. Since its start, AVDX has handled more than 190 million invoices for its buyers and suppliers. The company has benefited from 20 years of transactions because its founders understood the importance of data input during product development and operation. AVDX is confident in its ability to more accurately take in invoices, manage risk intelligently, and carefully evaluate credit because it is always learning new things.
Diverse integration capability
AVDX’s more than 200 accounting system integrations give its clients the freedom to build a custom technological stack suited to their unique needs, regardless of their company’s size, scope, or industry. The “built inside” integrations of AVDX, many of which are API-based interfaces, allow for more liquid data flows, improving user experiences and utility while also granting access to a range of features and a degree of customization that were previously available only to large enterprises.
Entering new verticals?
I must say a vast, unrealized opportunity exists for AVDX to enter adjacent and new market segments in the middle market. To execute in-house development to build vertical domain capabilities, increase the number of bank and software partnerships, and broaden the scope of next-generation APIs and “built inside” integrations, AVDX will continue to invest in vertical sales teams in various regions. The company has recently expanded into the education industry and bought Core Associates. This has helped it become one of the most successful AP service providers in the construction industry.
AVDX also has international expansion plans, with a primary focus on the Canadian, British, and European markets. For AVDX’s international expansion, the company will leverage the partnerships it has established with its U.S.-based business partners.
AVDX believes that the market for AP software and payment solutions will continue to experience significant change and consolidation as a result of technological advancements and the increasing number of organizations that embrace these solutions. Despite AVDX’s confidence that businesses will continue to use AP and payment automation solutions, the company often finds itself marketing to prospective clients who have utilized a wide range of different solutions or have built their own in-house policies and procedures. In these situations, AVDX must be able to show internal stakeholders that its products and solutions are better than the client’s current methods or third-party solutions.
Fintech and banking institutions are two of AVDX’s most formidable rivals, and companies like Bill.com (BILL) and Coupa Software (COUP) are among its most direct threats. Other firms that offer similar products and services include niche software and service providers and ERP companies that offer individual modules. AVDX’s main competitors are businesses that provide end-to-end solutions for accounts payable and payments, as well as those that specialize in specific aspects of the process, such as document and workflow management, accounts receivable, or invoice and bill presentation. Due to the narrow focus of most solutions, it can be hard to get into new markets and get both big and small customers.
Based on these metrics, I still find AVDX to have an advantage over its competitors. As more and more companies, especially in the middle market, move to digitize their administrative tasks, I think the market for middle-market AP software and B2B payment solutions will continue to grow and develop, and AVDX is set up to take advantage of this trend.
Based on my investment thesis, I expect AVDX to continue growing at a high rate of ~20%, following its strong growth momentum in 3Q22. As I mentioned earlier, the TAM is huge, so there should be no issues for AVDX to continue capturing share, as long as they keep executing like they are now. I expect AVDX to generate $544 million in revenue in FY25. Assuming AVDX does that and trades at the same forward revenue multiple as today, it should be worth $11.17.
The markets for AP and payments are very competitive and dynamic, but they are also quite fragmented. I believe that the level of competition will stay high as long as companies keep using AP and payment automation solutions and as long as current and new competitors keep coming up with new and better products and services.
Exposure to mid-market
In a recession, I would expect more mid-market players to face a higher risk of shutting down relative to larger enterprises. Since AVDX over-indexes in this aspect, it will suffer a heavier impact during an economic downturn when the underlying clients shut down.
AVDX is undervalued. COVID-19 has intensified the requirement for enterprises to implement solutions that are flexible and cloud-based. This puts AVDX in a dominant position in the industry, as its in-demand solution is rapidly digitizing the entire AP process for the benefit of both buyers and vendors in the middle market. Furthermore, AVDX has made strategic connections, integrations, and expansion opportunities.