The Astonishing Avalara

After filing for an IPO with a $19 to $21 range, Avalara (AVLR) increased the range to $21 to $23 and then priced above-the-range last night at $24.

It's not surprising because the story behind this enterprise cloud software company is a great one. It's "astonishing" because it comes in an area that's typically a yawner - transaction tax compliance. Sales tax is a large part of it but it also includes others like excise tax, value-added taxes and specialty taxes.

The short version of the story is that tax compliance is complicated and tedious and the correct amounts must be computed and applied at the point-of-sale which doesn't allow a large amount of time for processing. There are over 12,000 tax jurisdictions in the US alone and knowing which rules to apply when is an almost intractable problem. It's not just the location - it can be different depending on the buyer's tax status, or the time of year (there are tax holidays in many jurisdictions for certain goods at certain times of the year) and it goes on and on.

What follows is a brief "story in pictures" along with some thoughts on potential risks (there are two obvious ones) and valuation.

The Story

First of all figuring out the tax is harder than you might think. There are (ever changing) tax rules, the need to geographically pinpoint the location, check sourcing rules, exemption status and tax holidays. After it's all said and done the records have to be managed and returns must be prepared and filed by jurisdiction - there are many in the US and the problem only expands globally.

There are lots of overlapping and changing tax jurisdictions in the US alone.

Many of the processing steps must occur in near-real-time at the point of sale.

Avalara has leveraged partners to both expand their distribution and create an "Avalara inside" model where their technology can be embedded in other product and service offerings.

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Disclosure: We do not have any vested interest in the shares of this stock at the time of writing and publication. We may however take a position post publication and are not under any obligation to ...

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