Deep Dive: Avalara
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What do they do? Avalara sells software to businesses to help with tax compliance. Their bread-and-butter is taxes for e-commerce, but they have acquired and developed many more offerings.
History? The company has three co-founders, Rory Rawlings, Scott McFarlane, and Jared Vogt. The idea came about in 2004, and the company is based in Seattle, Washington.
Industry? Management talks about an $8 billion opportunity in the United States and a larger opportunity internationally. Competitors include Vertex (a public company), Taxjar, Thomson Reuters, and others. The industry is supposed to grow at double-digit rates through 2027.
Management? CEO is founder Scott McFarlane. He owns 1% of outstanding shares and insiders own under 5% of shares.
Valuation? EV/sales of 28, EV/GP of 39, EV/OCF of 324.
Earnings? $500 million in 2020 revenue, 71% gross margins, 9% operating cash flow margins.
Balance Sheet? $675 million in cash, no debt, $68 million in long-term leases. Clean balance sheet.
Potential Competitive Advantages? We had partnerships with third-parties, scale, and government complications with taxes.
Potential Future Growth Opportunities? Partnering with ERP solutions, Shopify+ partnership, and international expansion.
Highlights? Everyone needs this product, strong culture, and a clear path to consistent sales growth over the next five years.
Lowlights? The counterparty risk of relying on the government (similar to Intuit) leaves Avalara potentially exposed, weak revenue retention rates, having to continually spend on the sales force will hamper operating profits.
Disclosure: The authors and podcast guests are not financial advisors. Brett Schafer and Ryan Henderson are portfolio managers at Arch Capital. Clients of Arch Capital may hold securities discussed on this podcast.