KeyBanc Upgrades Avalara After 42% Fall, Says Tax Software Maker Has $1B Potential

Shares of Avalara Inc AVLR are 42 percent off their highs, making the tax software company that started trading on the public markets in June an attractive investment, according to KeyBanc Capital Markets. 

The Analyst

KeyBanc's Brent Bracelin upgraded Avalara from Sector Weight to Overweight with a new $47 price target.

The Thesis

Avalara is well-positioned as a cloud software company to take full advantage of potential changes in sales tax compliance, Bracelin said in the upgrade note. (See his track record here.) 

Five states are now actively enforcing online sales taxes as part of the South Dakota v. Wayfair case, the analyst said. Another 10 states will start enforcing sales taxes on online sales Monday, he said. 

The change in how states collect sales tax directly benefits Avalara, as the company's cloud software manages transaction tax workflows, Bracelin said. This is a highly complex process that companies typically outsource, and any audits as the result of inaccuracies typically cost $5,000 per $1 million in revenue, he said. The high cost creates a compelling value proposition for Avalara, which typically serves mid-market companies but is also addressing small business and enterprise markets, in Bracelin's view. 

As states begin enforcing online sales tax collection, Avalara will be seen as a "natural insertion point" for companies looking for cloud-based tax compliance software, Bracelin said. The market opportunity in sales tax implies the company has the potential to grow into a $1-billion cloud software franchise, he said. 

A short seller report highlighted concerning operating efficiency metrics, poor job reviews on Glassdoor and mid-level executive departures at Avalara, the analyst said. While Bracelin said these are legitimate concerns to monitor, the likely conclusion is these factors are company-specific and "fixable" given the healthy demand environment for cloud software that facilitates sales tax automation, he said. 

Price Action

Avalara shares were up 7.36 percent at $37.50 at the time of publication Monday.

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