Fade the rally in this software stock: Wells Fargo

Investing.com -- Wells Fargo analysts urged caution toward Bill.com Holdings (NYSE:BILL) in a note Monday, despite signs of improved business spending, saying they are willing to fade the recent rally in the software stock.

The bank maintains an Underweight rating and price target of $45 a share on the stock, expressing doubts about the company's near-term profitability and long-term growth initiatives.

While the company's recent fourth-quarter performance reflected strength and spending among small and medium-sized businesses (SMBs) showed promise, Wells Fargo (NYSE:WFC) remains skeptical about BILL's multi-year growth strategy.

"We remain cautious around this 'show me story' to return to >20% core rev growth in FY26," said the bank.

A major concern stems from BILL's new $45 million investment into virtual cards, aimed at improving take rates and driving higher transaction volumes.

However, the analysts question whether these efforts will be effective: "With take rate under the microscope for over a year, we question (a) the effectiveness of the take rate expansion levers at management's disposal and (b) BILL's ability to return to >20% 'core' growth in FY26."

Additionally, Wells Fargo is wary of BILL's operating leverage prospects, particularly after recent incremental investments forced investors to lower EBIT expectations.

"We remain skeptical around BILL's terminal margin profile and see complacent margin modeling by the Street," they wrote.

Though Wells Fargo acknowledges an uptick in B2B spending that could boost revenue and volumes in the company's first fiscal quarter, the analysts see competitive risks looming.

Wells Fargo believes the company's guidance is more realistic than optimistic and recommends maintaining a cautious stance. With shares down 29% year-to-date and skepticism about BILL's future growth, they believe investors should remain cautious.