Buy Avalara To Benefit From Long-Term Sales Tax Changes

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Try To Stay Awake

In the current era when everyone wants to invest in tech stocks, the more outlandish the better (everyone’s an expert on no-SQL database structures and microservices orchestration these days, at least if you believe FinTwit), the notion of putting your money to work in, wait for it, a tax software company, isn’t all that exciting. Where, you say, is the multibagger in that? Tax software? That’s using technology to change the world how, exactly?

This is the thing. In your mix of investments, you likely want some stodgy old boring stuff that never gets you excited but never lets you down, some hot banzai stuff that on any given Sunday has you either wishing you had the guts to have bought more of it, or wishing a higher authority had stopped you from buying any of it, and, some stuff in the middle that just chugs along churning out the gains every year.

Tax software as a category falls in that last bracket. The middle. A well-run tax software company grows revenues because taxes forever grow in number and in complexity – and grows its profitability and cash generation because, usually, most software founders cannot get motivated to write tax products, and so the competition is limited – ergo end customer pricing stays high.

Avalara (NYSE:AVLR) fits the bill precisely. It’s cloud, so you can’t say it’s completely boring. But it’s tax, so you can count on it. The middle. Right down the middle of your portfolio. See?

Better yet, governments worldwide are waking up to a new way to collect money, which is to say online sales taxes. For two decades now, retailers selling online have for the most part not had to pay sales taxes in the jurisdiction the products were purchased – unlike a traditional retailer. This is changing in the US and beyond, and we don’t see it going back on itself. A new category of tax? That people have to pay in order to get their stuff? That’s here to stay.

Here are the numbers on AVLR, including the most recent quarter which accelerated nicely on most fronts.

Source: Company SEC filings, YCharts.com, Cestrian Analysis

In line with a number of cloud stocks a couple of years into their lives as public companies, this business is now generating positive pre-tax unlevered free cash flow. You can ignore the GAAP EPS losses if you’re looking long term and don’t care whether the stock beats or misses somebody’s idea of what that EPS should be at any particular point. Here, you have growing, predictable revenue and self-sustaining cash flows, serving a growing end market worldwide.

Fundamental valuation as follows:

Source: Company SEC filings, YCharts.com, Cestrian Analysis

We’ve been at Neutral for a little while but recently moved to Buy in our subscription service once the stock let out a little air post Q3 numbers. The stock sits at a possible support level right now.

Source: TradingView, Cestrian Analysis

If you’re thinking of buying AVLR at this point, you might well consider not buying a full allocation on day one. If there’s ongoing weakness in the stock, you may get a chance to buy nearer that lower parallel support line – call it $135-140 if a tech correction hits. But a buy at this time, with a long-term view – say three to five years – that’s a winner, in our opinion. We think the stock can outpace the market as a result of the market segment tailwind and the accelerating growth in the company itself. Which is why, on a personal basis, we too own the stock with a long-term view in our staff accounts.

Cestrian Capital Research, Inc – 17 November 2020.

Disclosure: I am/we are long AVLR. Business relationship disclosure: See disclaimer text at the top of this article.

Additional disclosure: Cestrian Capital Research, Inc staff hold personal account long position(s) in AVLR.