Avalara’s initial public offering set the New York Stock Exchange ablaze in a sea of orange on June 15, as the Seattle-based sales tax automation company’s shares nearly doubled in their opening day of trading, according to CNBC.
But while Avalara’s IPO looks hot, it’s overpriced, some analysts say.
Shares of Avalara closed up 87 percent at $44.94 after opening at $35, according to CNBC. Avalara had priced its IPO at $24 per share on June 14, well above its estimated range of $19 to $21, Barron’s reported. The company raised $180 million through its sale of 7.5 million shares.
The stock is listed on the NYSE under the ticker symbol “AVLR.”
According to Accounting Today, Avalara CEO Scott McFarlane said last Friday that the company will continue to do what it’s doing, “building out content, getting more partnerships in the marketplace, looking for opportunities in order to build out adjacent products just like it’s done in the past with exemption certificates, returns and the like.” He called the listing on the NYSE “an honor and a humbling experience.”
But not everyone is on the Avalara bandwagon. In an article for Seeking Alpha, Silicon Valley finance professional Gary Alexander wrote that with only 25% year-over-year growth in the first quarter of this year, and with growth in fiscal year 2017 trailing most other SaaS stocks at just 27% year-over-year, “it’s difficult to declare that Avalara is anything more than average.”
It’s difficult to be bearish on recent IPOs because of how they all tend to trade singularly upward. But in my view, Avalara has very limited upside left at its double-digit revenue valuation. If and when the market turns sour again and investors begin to pay closer attention to the high valuations at which SaaS IPOs trade, richly valued stocks like Avalara could see an unpleasant crunch.
And in an article for MarketWatch, David Trainer, CEO of New Constructs, an equity research firm, and New Constructs investment analysts Kyle Guske II and Sam McBride gave Avalara’s stock an “Unattractive” rating.
When we analyze the cash-flow expectations baked into the stock price, we find that Avalara is overvalued, despite what traditional metrics show.
To justify even a price of $20 (the midpoint of the proposed IPO price range), Avalara must immediately achieve 12% NOPAT [net operating profit after tax] margins (average of all software firms with positive margins under coverage) and grow revenue by 21% compounded annually (average of all software firms under coverage) for the next seven years. For reference, Avalara’s NOPAT margin was -24% in 2017 so this scenario implies immediate and drastic improvements in profitability.
In a more conservative scenario, if we assume Avalara can achieve a 4% NOPAT margins (slightly better than salesforce at 3%) and grow revenue by 21% compounded annually for the next decade, the stock is worth just $7 a share today — a 71% downside from the IPO price.
Avalara’s offering is expected to close on June 19.