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Small-Cap Confidential
Undiscovered stocks that can make you rich

February 11, 2022

After the close yesterday, SiTime (SITM) reported Q4 results that handily beat expectations. Revenue of $75.7 million was up 88% and beat by $4.7 million while adjusted EPS of $1.32 was up 207% and beat by $0.23. Gross margins increased 2.5% to 69.4%. The company ended the quarter with $559 million in cash (partially thanks to $460 million raised through equity offerings in 2021) and no debt.

Avalara (AVLR) Reports Q4
Avalara (AVLR) reported Q4 results yesterday after the bell that surpassed expectations. Revenue grew by 35% to $195 million (beating by $10.8 million) while adjusted EPS of -$0.06 beat by a penny. For the full year 2021, revenue grew 40% to $699 million while adjusted EPS dipped to -$0.15 from $0.11 a year earlier.

Management’s first stab at 2022 guidance includes revenue of $856.5 million (+23%) which is ahead of consensus of around $850 million (+22%). There is certainly some conservatism baked into that figure.

Stepping back, Avalara is one of those companies trying to make the transition from a small- to medium-sized software provider to a much larger “go to” provider of tax compliance software. It should easily be able to generate over $1 billion in sales in 2023. That would represent a major milestone.

It has made a lot of investments in content and specific solutions (many through acquisitions) to build out its product offering, integrations, etc. In doing so, the company is making it easier for large and small clients to say, “let’s go with this company because it’s the obvious choice and it will grow with us as our taxes get more complicated.”

Crossing that chasm from a smallish outfit to a significantly larger one is not easy. We’ve seen a lot of small caps that get close, only to fail. There are no guarantees that Avalara will make it, but across the spectrum of companies I follow, I think the chances are decent that it will. This doesn’t necessarily mean it will go from being a $10 billion market cap company to a $20 or $30 billion (or whatever) one. Much of that will depend on what the profit and cash flow profile looks like, as well as what investors are willing to pay in terms of valuation.

But again, stepping back, it seems the pieces are here for Avalara to become the go-to provider of tax compliance software, which is a market with long-term growth potential. That suggests quite a bit of upside potential, especially from a seemingly depressed share price today.

We’ll keep an eye on shares as a drop back into the 95 – 100 zone would be a little concerning. Until then, keeping at buy. BUY

One Note on Small Caps Right Now
I forgot to mention in yesterday’s Weekly Update that there’s this growing buzz about the current small-cap valuation discount as compared to large caps. Bank of America has been particularly vocal about the potential for small caps to do well over the coming years (versus large caps). In order for that relative performance scenario to play out – and I know I’m stating the obvious here – small caps need to rise or large caps need to fall. Or some combination of the two.

Bottom line – if you’re interested in playing the potential, then by far the easiest route is with the iShares S&P 600 Small Cap ETF (IJR). You could opt for the value version (IJS) or the growth version (IJT), though until a performance gap starts to open up, I’d just go with the IJR.

I know nobody gets super excited to jump into an index ETF. But I also know at these times some might want to place larger positions on lower-risk investments to play a big picture theme. And I wanted to put this one on your radar as an option.

The IJR is roughly 4.5% above the 103 support line that’s held up since last spring (with the exception of one quick dip to 100.6 a couple weeks ago). I’d probably be comfortable (in the near term) buying up to around 110. If the ETF falls below 100, I’d probably get out completely as overall market conditions would have likely deteriorated significantly if that happens.