Six analysts rate this software company’s shares a ‘buy’, with an average target price of $99.
Avalara, Inc. (AVLR)
From Personal Wealth Advisor
For years, e-commerce companies mostly dodged the responsibility to collect sales tax. Unless they had an actual, physical presence in the state or jurisdiction where a sale was made, by-and-large they weren’t responsible for collecting sales tax. It was actually a pretty sweet deal for e-commerce companies, but the Government Accountability Office estimates that states lost as much as $13 billion in sales tax revenue in 2017.
That changed last year when the U.S. Supreme Court issued a ruling in South Dakota v. Wayfair. South Dakota was going after online retailer Wayfair for what it considered delinquent sales taxes. Wayfair believed it didn’t owe the taxes. The case wound its way up to the Supreme Court, which ruled that states can require businesses without a physical presence to collect and remit sales taxes if they have more than 200 transactions or $100,000 in sales.
That was bad news for Wayfair and other large- and medium-sized e-commerce companies, which suddenly found themselves liable for collecting sales tax. While the ruling levels the playing field between online and brick-and-mortar companies, how is a company based in San Diego, California, supposed to know the various tax rates in Roanoke County, Virginia?
That’s where Avalara, Inc. (AVLR) comes in.
Avalara offers a Software-as-a-Service program that streamlines the process. Its Software-as-a-Service program can be built into an e-commerce platform, has a database of all the different sale taxes in the U.S. (and increasingly abroad) and builds the appropriate taxes into the customer’s invoice. Not only does that ensure that the correct tax is collected, it also streamlines the process of remittance and reporting for the company using the software.
In the third-quarter, revenue grew 41%, to $98.5 million, well above the $93 million analysts expected. Subscription revenue grew 42% in the quarter and now accounts for nearly 95% of total revenue, meaning Avalara has a strong base of recurring revenue. Its customer count rose 32% to 11,240 core customers, while its net retention rate was 113%, meaning the company is gaining more new customers than it loses in a given quarter.
The performance was so strong that management boosted its 2019 guidance by about $10 million to $375 million, or about 38% growth. It also said it expects 2020 revenue growth in the mid-20% range, which would take revenue up to about $460 million.
Despite that strong growth in revenue and billings, Avalara isn’t profitable and likely won’t be next year. Its operating loss margin has narrowed to the low- to mid-single digits, but I expect it to run at that level for at least another couple of years as it continues to expand internationally.
At this point, I can’t say that the company is a great deal from a valuation perspective, as it’s trading at almost 15 times its sales, compared to the 2.7 times sector average. That said, there aren’t many companies that are turning in such blistering growth these days, at least not whose accounting you can really trust.
Buy Avalara under $100.
Ian Wyatt & Ben Shepherd, Personal Wealth Advisor, www.wyattresearch.com, December 4, 2019