November 21, 2018

Avalara IPO Has Big First Day of Trading, But Some Analysts Are Skeptical

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.”

He continued:

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.

They wrote:

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.

Related articles

Tracking Charitable Donations? Now There’s a CPA-Developed App for That

In more non-iPad, Apple-related news, we learned earlier this week about iDonatedIt, an iPhone app developed by BMG CPAs in Lincoln, Nebraska. The app is designed to track all non-cash charitable contributions whether it be clothes, furniture or family members (okay maybe not the last one). This will allow you to track all of our donations to Goodwill, Salvation Army, etc. rather than receiving that crappy receipt they give you that has nothing on it.

Being interested in all things accountant-ish, we got in touch with BMG to find out how this bit of ingenuity came about.

We spoke with Todd Blome, a partner at BMG who came up with the idea and he told us that as soon as he got an iPhone he was thinking of ideas for apps that would be useful for his clients. Since Todd is the tech-savvy partner at BMG, (he heads up their IT consulting services) he started kicking around ideas right away and eventually landed on the idea for iDonatedIt.

Todd told us that the development was fairly simple and that there were only two test versions prior to releasing the app.

“So far we’ve 100% positive feedback on iDonatedIt,” Todd told us, “We’re definitely looking for suggestions for improvements or add-ons.” The one idea that has been floated to Todd was adding a tax savings tool to the app so that a user could determine how much tax savings would be created by the donations. “That will probably be in version two,” he told us.

iDonatedIt retails for $2.99 at the app store and as Todd noted, “a donation of one item pays for the app.” A version for the Droid is currently in the works as well.

Todd and the rest of of his team at BMG are kicking around a few more ideas for apps but he said they want to make sure iDonatedIt is working as good as possible before committing to another project. Check out the demonstration below and jump over the firm’s website or follow them on Twitter to give them your feedback.

Non-Profits Are Feeling the Pain

WSJ has a Monday piece “Once-Robust Charity Sector Hit With Mergers, Closings” (the Recession Forces Nonprofits to Consolidate) that may be found here. It tells the story of a “homeless” woman with terminal lung cancer and a charity no longer able to afford to help her out. Sad.

When one charity’s COO says “we’ve had funding cut after funding cut, and we never know when the next shoe is going to drop,” that is a bad sign.

Hit by a drop in donations and government funding in the wake of a deep recession, nonprofits—from arts councils to food banks—are undergoing a painful restructuring, including mergers, acquisitions, collaborations, cutbacks and closings.

“Like in the animal kingdom, at some point, the weaker organizations will not be able to survive,” says Diana Aviv, chief executive of Independent Sector, a coalition of 600 nonprofits.

I saw that on the Discovery Channel and it wasn’t pretty.

Note: the Service says the value of your blood is not deductible as a charitable donation but cars are. As of 2005, cars are only deductible at FMV, not Blue Book. Damn you, fair value, foiled by the free market again!

Blame the Service for tightening its charitable donation rules at the worst possible time? Not sure on that one. While you’re reluctant to donate your $200 Toyota (ha) to charity because you could have claimed $2,000 under old rules, find some comfort in the fact that (alleged) terrorist “non profits” can not file for 2 years and somehow get away with it. You wonder why I advocate fixing the system from the ground up?

You can text $10 to Haiti but what about the “Economic Homeless” here in America? asks Young Money.

If this were a survey and you asked me “What do you think the IRS could do to encourage charitable donations?” I would answer “Tax breaks. It isn’t the Treasury’s job to distribute bailouts.” Yet they continue to behave as though it is their duty.

See the problem yet?