Bill.com’s Deal With Wells Fargo Could Deliver a 254% Gain
Trade summary: A bull call spread in Bill.com Holdings, Inc. (NYSE: BILL) using the June $80 call option which can be bought for about $6.20 and the June $85 call could be sold for about $5.10. This trade would cost $1.10 to open, or $110 since each contract covers 100 shares of stock.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $1.10. The maximum gain is $390 per contract. That is a potential gain of about 254% based on the amount risked in the trade.
Now, let’s look at the details.
Bill.com provides a cloud-based software for back-office financial operations for small and midsize businesses (SMBs).
The company’s artificial-intelligence (AI)-enabled financial software platform enables users to generate and process invoices, streamline approvals, send and receive payments, sync with their accounting system, and manage their cash.
Through its platform dashboard, users can view their cash in-flows and outflows as well as bills coming due. Its platform enables document management and bill capture. It also offers various payment services, including automated clearing house (ACH) Payments, card payments, checks and cross-border payments.
Its product offers solutions for accounts payable, accounts receivable and international payments.
BILL recently reported its results for the company’s third fiscal quarter ended March 31, 2020.
Traders seemed to like the news and pushed the stock higher.
According to Business Wire, “Bill.com reported solid quarterly results highlighted by strong revenue growth and a healthy pace of new customer acquisition,” commented Bill.com CEO René Lacerte.
“Our platform is mission-critical to SMBs and we have found this to be especially true in the current work-from-home environment. We are optimistic that our purpose-built platform will resonate even more with SMBs who are now coping with the reality that the old way of managing their back-office financial operations doesn’t work anymore.”
Total revenue for the quarter was $41.2 million, an increase of 46% from the third quarter of fiscal 2019. Subscription and transaction revenue was $36.1 million, an increase of 63% from the third quarter of fiscal 2019.
Interest on funds held for customers, which the company refers to as float revenue, was $5.1 million, a decrease of 16% from the third quarter of fiscal 2019.
Net loss was $8.3 million, or ($0.11) per share, basic and diluted, compared to net loss of $2.0 million, or ($0.26) per share, basic and diluted, in the third quarter of fiscal 2019. Non-GAAP net loss was $2.9 million, or ($0.04) per share, basic and diluted, compared to non-GAAP net loss of $138,000, or breakeven on a per share basis, basic and diluted, in the same period last year.
Cash, cash equivalents and short-term investments were $382.4 million at March 31, 2020.
The company served over 91,000 customers, representing year-over-year customer growth of 28%. BILL processed $24.2 billion in total payment volume, an increase of 35% year-over-year. This was over 6 million transactions, representing an increase of 23% year-over-year.
Significantly, the company signed an agreement with Wells Fargo Bank, N.A. to integrate Bill.com into its Commercial Electronic Office (CEO) online electronic banking portal.
Longer term, BILL appears to be bouncing off support dating back to late last year. This could set up a move towards highs near $80.
A Specific Trade for BILL
For BILL, the June 19 options allow a trader to gain exposure to the stock. This trade will be open for about six weeks and allows for traders to turn over capital quickly, potentially compounding gains several times a year.
A June 19 $80 call option can be bought for about $6.20 and the June 19 $85 call could be sold for about $5.10. This trade would cost $1.10 to open, or $110 since each contract covers 100 shares of stock.
The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $110.
The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.
For this trade in BILL, the maximum gain is $3.90 ($85- $80= $5; 5- $1.10 = $3.90). This represents $390 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $110 to open this trade.
That is a potential gain of about 254% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.
A Trade for Short Term Bulls
As with the ownership of any stock, buying BILL could require a significant amount of capital and exposes the investor to standard risks of owning a stock.
To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.
Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.
To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.
This strategy is designed to profit from a gain in the underlying stock’s price but the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.
Source: The Options Industry Council
Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.
This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.