Summary
- Avalara is the clear leader in tracking and managing sales tax collection online.
- Avalara is well-positioned to collect a small piece of an exponentially growing number of transactions in the future.
- At a $5 billion market cap, it's still early in the Avalara story; the stock could double several times from here.
- The company is growing at around 40%/year. Incredibly enough, its growth rate has now accelerated for each of the past six quarters.
- Avalara should be a big winner as ecommerce moves beyond Amazon onto smaller niche sites powered by firms like Wix and Shopify.
- This idea was discussed in more depth with members of my private investing community, Ian's Insider Corner. Get started today »
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In my September portfolio purchases, I opened a position in Avalara (AVLR). Since it is a fairly recent IPO, has little name recognition or coverage generally, and is still small enough that it could have multi-bagger upside, it's worth taking a closer look at this company. Also, a prominent investor just put 18% of his whole fund into Avalara stock last quarter. More on that in a minute. But first, what is Avalara?
Avalara's mission is simple and fits within their logo:
Over the years, they've built out a software platform that helps companies - particularly online retailers - automatically track and categorize their transactions. It works with both keeping a data trail for accounting/auditing and ensuring that retailers collect the proper amount of sales tax during purchases.
They've also developed and acquired numerous pieces of technology for even more specific types of tax collection, such as on liquor sales, lodging taxes, and fuel purchases:
Source: Avalara corporate presentation
The company is now starting to expand outside of the U.S., adding solutions for tax compliance in markets such as Brazil and Europe as well.
There are a few reasons why Avalara should have a long runway. For one, cross-border e-commerce is set to hit $1 trillion annually next year, with little sign of slowing down. Companies with a sophisticated multi-jurisdiction solution like Avalara should get a large chunk of market share as more and more businesses move to automated and cloud-based solutions. Depending on who you talk to, there are only one or two competitors anywhere close to Avalara's level of capability.
Additionally, in the company's core American market, a key Supreme Court decision - Wayfair vs. South Dakota - last year found that states can force companies to collect sales tax on purchases, even if the e-commerce company has no physical presence in that state. Here's one comment from last year describing the potential impact:
If you talk to CPAs and CFOs, they will tell you there are 2 firms - Avalara and Vertex. Most firms' fees will double next year as a result of this ruling. [Some people] clearly doesn't understand the bureaucracy involved in filing returns. It is a nightmare and it has to be outsourced. The smaller players do not have connectors to all of the large ERP systems (SAP, Magento, Oracle, etc). Vertex and Avalara do. Avalara's revenues will now grow 50% next year with no new customers. How does a guy selling widgets online in Tennessee file a California sales tax return? How does he know that Santa Barbara County may have changed their rate yesterday and there is a sales tax holiday on 8-5? It's impossible. Has to be outsourced and Avalara and Vertex are the only games in town.
Remember when companies would avoid having warehouses or any other tangible presence in states to avoid taxation? That trick no longer works, and as a result, digital sellers are rushing to figure out how to collect tax and not violate any legislation in the many different cities and states they sell in. Enter Avalara, which has a sophisticated solution to automatically figure out how much tax to charge down to a literal house-by-house basis:
...Originally Posted On Seeking Alpha
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