Avalara, Inc. (AVLR) is on the Hedgeye Technology Best Ideas List as a SHORT.
Why we care?
- Avalara isn’t such a young company, originally founded in 1999, and then in its current form in 2004.
- Employees had been promised an exit for several years prior to the IPO (including a full IPO prep in 2015). Based on our reviews of employee comments, we expect a fair bit of pent up selling.
- Some very mixed currents in the company culture with the company requiring outside lawyers to fix sexual harassment charges, and a number of (persisting) other problems that we surfaced in our deep dive (to view the replay/slides of our Sept. 26 call, CLICK HERE).
- Employees know that the category they are in will not make AVLR the next HUBS; there are deflationary elements in the marketplace like Intuit charging a low monthly price for similar functionality, or Amazon performing the service to its selling base off internal tools, and even the upside drivers like the beginning of the march into a high ARPU range of large enterprises will require an elongated sales cycle and a forklift upgrade to the company’s struggling support teams.
- Employees see that the company has struggled with efficiency historically, and now must pivot towards profit and cash flow at a time that the growth rate is likely to deflate; for investors this may mean that middle of the road software EV/S rates of 5-6x may be a shallow trough with real bedrock value only when the company can transition fully to FCF.
- All of these are factors which, when we consider that this Wednesday ~54MM shares become unlocked out of 67MM total diluted shares outstanding, we think the added liquidity could be very tough for the stock.
AVLR is down ~32% since we put the Short on with a 40% downside risk. We acknowledge that it is much closer to our target price, but we can also share that at this point we have zero interest in getting Long.
Please call or e-mail with any questions.
Ami Joseph
Managing Director
Yosef Vaitsblit
Analyst
