The tax software provider Avalara Inc (NYSE:AVLR) enjoyed a massively successful IPO last Thursday, reaping in tens of millions more than the company initially expected. Shares of the company soon skyrocketed after its debut, nearly doubling in a single day, though trading has since cooled off. While some are worried that Avalara could prove to be significantly overvalued, the company’s growing revenue streams and recent regulatory relief have many investors interested in it.
An analysis of Avalara’s S-1 filing show that the company may not necessary be able to sustain its huge growth, however. These are the key facts behind Avalara and its recent IPO.
When news broke that Avalara’s shares were trading upwards after its market debut on Thursday, not too many in the market were surprised; after all, the company raised its expectations for the IPO slightly before its debut on the New York Stock Exchange, and many expected it to net a clean $150 million at least. When the company eventually made the 7.5 million shares of common stock it intended to sell open to the market, however, investors quickly scooped up as much as they could, and share prices briefly soared as high as $44 per share.
All in all, the company reaped in at least $180 million with its mammoth IPO, greatly exceeding expectations. According to its initial S-1 filing with the SEC, Avalara had hoped for some $150 million, though expectations had indeed been raised slightly before it hit the market. Some are concerned that its share prices are actually overvalued, given that they virtually doubled right after hitting the market, but the recent trend of companies digitizing their tax operations with more software has many betting on the company.
That S-1 filing contains some concerning news, however; while Avalara has steadily seen its revenue growing recently, enjoying a 27 percent surge in revenue in 2017 alone, the company has yet to turn a profit. It’s valuation at the height of its share trading nearly hit $3 billion, too, a staggering sum that many in the market considered absurdly too high for the tax software provider that shows promise but isn’t yet a behemoth in the market.
In a nutshell, Avalara’s operations are centered on the automating tax software programs for companies that need to buy YouTube subscribers, which are trying to cut cost by going the digital route. By using advanced software, the company greatly streamlines the tax process and helps minimize costs while boosting efficiency, and is becoming fairly popular on the market. The company’s prospectus claimed that in 2017 alone it serviced well over 16 million tax determinations each day, for instance.
Given that Avalara also has more than 200,000 customers of disparate sizes, it’s fair to say that it has a healthy audience that many investors will see potential in. Nonetheless, it’s worth discussing the fact that the bar has been set incredibly high for the tax software provider, and Avalara’s history of unprofitability should be much more concerning to early backers than it appears to be. The company posted net losses of some $64 million in 2017, after all, and while a rush of cash into its coffers will likely prove to be a boon in the market, it’s not showing signs of turning a profit soon.
Given that the global tax software industry appears to be thriving currently, however, Avalara could yet ride out the success from its IPO to make a serious splash in the market in the long term. While cautious investors are likely to shun Avalara thanks to its less-than-stellar finances, the company could yet woo over many who are convinced that an increased wave of digitization across the market will continue to see an influx of customers employ Avalara’s services. Avalara’s growing revenue streams may seem appealing to some, but its ultimate net-losses simply give truth to the fact that the company’s nearly $3 billion valuation is probably too steep for it. Tax software will doubtlessly remain popular in the near future, and Avalara is showing healthy signs of growth that could yet make it a force to contend with, but a rapidly inflating share price is likely to beset the company with some serious expectations in the near future it may not be able to meet.
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