Source: Unsplash 

Quick Summary

Avalara provides cloud-based compliance solutions for companies to calculate, collect, and pay taxes, as well as managing tax records and compliance documents. The firm sells 3 products. Avatax is its primary offering, used for collecting U.S. sales taxes, European VAT taxes, lodging taxes, communications tax, tariffs, and more. Avalara Returns is used for tax return preparation, filing, and remittance, often for multiple jurisdictions. Finally, Avalara Compliance Document Management is used for creating and validating sales tax exemption and reseller certificates, which are needed for proving tax-exempt purchases. The bulk of Avalara's revenues (93%) are from subscriptions to one or more of its products, with the remainder coming from various tax-related professional services. Avalara's solutions integrate directly with many popular business management platforms for e-commerce (like Shopify or BigCommerce), accounting, marketplaces (such as Etsy), enterprise resource planning (ERPs), point-of-sale (POS), and customer relationship management (CRM - like Salesforce) systems.

Does The Company Have Rising and Recurring Revenues?

YES. Avalara's 3-year compound annual revenue growth rate is strong at 33%. The firm is benefiting not only from a broad and secular increase in e-commerce but from even the smallest of companies selling both interstate and internationally, which greatly complicates tax compliance. This is amplified by the 2018 South Dakota vs. Wayfair decision that states can collect sales taxes on businesses not physically located within their borders. Avalara sees its addressable market as $8 billion or more, vs. about $500 million in current annual revenue - plenty of room for growth. With well over 90% of revenue coming from subscription fees to cloud software solutions, Avalara also boasts a highly recurring revenue model.

Does The Company Have Durable Competitive Advantages?

YES. Tax calculation and collection is a core business responsibility. It is also very complex. The U.S. alone has over 11,000 tax jurisdictions (federal, state, and local), that push through nearly 600 changes every year. Internationally, the situation is even more complex, with tariffs and value-added taxes (VAT), along with different thresholds and requirements in each country. Once Avalara's solutions are integrated and working within a merchant's software systems (no small task), switching would be quite disruptive and carry business risk, giving the firm HIGH SWITCHING COSTS. These are evident in Avalara's revenue churn (canceled revenue is below 4% a year), and net revenue retention rate, which has averaged around 110% (meaning it loses few customers and the ones that stay spend about 10% more a year). Avalara faces some competition. Vertex and TaxJar are notable competitors, but Avalara is the largest player in this particular space and the only one with a fully featured set of solutions for both large and small businesses.

GreenDot Rating: GREEN

Avalara earns the GREEN (highly attractive) business model rating. It clearly has the three core business characteristics we look for. Tax calculation and collection is a common business problem for both large and small companies. It is only getting more complex by the year, as politicians continue to complicate the tax code for political purposes and to pay massive government debts. Avalara offers the leading solution, and as a core business function that is not trivial to implement, has high switching costs. Growth potential and recurring revenue are also there in spades. CEO Scott McFarlane is one of the firm's original co-founders, another plus in our book. An attractive package all around, this makes for an intriguing investment opportunity, if selling at a reasonable price.