Avalara (AVLR) – We continue to rate this stock a SELL, but their metrics have the opportunity to undergo a re-rating. In addition, the company now has a long runway to grow gross margins. Avalara is a stock we cover in our General Portfolio of companies.
4% Dilution to raise nearly $240 million – One week prior to its one-year IPO anniversary at $24 IPO, this tax compliance company raised $237 million on June 10th at an issuance price of $69.40, adding to its $147 million in net cash. The secondary resulted in a relatively minor 4% dilution.
No change in the FCF outlook despite future spending – The use of proceeds was said to be used for “headcount expansion, continued investment in our sales and marketing efforts, product development” among other things including a potential tuck-in acquisition.
There has been no formal change in the company expecting to be free cash flow (FCF) breakeven by the second half of 2019. Announcing a material change in its FCF guidance would not appear to be something the experienced co-founder CEO would do.
A reminder that this is a hyped stock – The macro tailwinds are well known, with the U.S. Supreme Court ‘South Dakota vs. Wayfair’ ruling in June of last year allowing States to tax online sales. NY and California went live with these changes earlier in 2019 while other large states such as Texas and Pennsylvania are about to. In addition, reporting 2019 mid-point revenue guidance up 5% on May 7th (share price jumping 23%) and their first Investor Day on May 9th only helped to fuel the fire. We believe this is all priced into the stock as this has all been well documented.
Details might be overstating Q1/19– Avalara saw $2 million in non-recurring revenue in Q1 and continues to see ASC 606 sales and marketing benefits that may be positively impacting investments. This may be causing some optimistic forecasts and quant buying.
Over-stating the current e-Commerce integration – Both on their Q1 investor call and investor day, Avalara noted partnerships with large e-Commerce platforms Shopify and Wix are an increasing driver in growth. However, Shopify only allows Avalara’s AvaTax for its roughly 5,000 ‘Shopify Plus’ users while Wix notes the add-on is in beta mode. AvaTax may actually be seen as a competitor by Shopify as they offer their own. The impact from e-commerce partners remains in its infancy for Avalara.
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