Cloud-based software platform provider Avalara, Inc. (AVLR) generated significant gains over the past year as several businesses turned to its services to make their tax compliance hassle free. The stock has rallied 100.5% over the past year to close yesterday’s trading session at $146.27.

However, after reporting a net loss for its fourth quarter (ended December 31, 2020), the stock witnessed a sharp decline. It is currently trading 21.1% below its all-time high of $185.37, which it hit on February 10. Moreover, the company is still in its “early days of penetrating a huge addressable market to automate global tax compliance” according to Scott McFarlane, AVLR’s co-founder and CEO.

So, the company still has a way to go, and many developments to complete, before it can position itself as a leading player in the space.

Click here to check out our Software Industry Report for 2021

Here’s what I think could shape AVLR’s performance in the upcoming months:

Several Acquisitions

AVLR has made several acquisitions over the past few months, which have been  profitable for the company. Last December it agreed to acquire INPOSIA Solutions GmbH, a German software company focused on e-invoicing, digital tax reporting, and business and data integration to address real-time compliance requirements for companies worldwide. The acquisition is expected to be completed in the first half of this year.

The company also acquired Impendulo Limited in  December, and the operational assets of Business Licenses, LLC in  November. And in October, AVLR  acquired Transaction Tax Resources, which is expected to enhance its enterprise capabilities and create the leading taxation content database.

Mixed Financials

For its fiscal 2020 fourth quarter, ended December 31, 2020, AVLR’s top line climbed 34.5% year-over-year to $144.76 million. Its non-GAAP gross profit for the quarter increased 40.2% year-over-year to $107.69 million, and its non-GAAP gross margin came in at 74%, compared to 71% during the fourth quarter of 2019. Its non-GAAP EPS of $0.09 also surpassed a consensus estimate by 250%. However, the company’s operating loss was  $19.68 million for the fourth quarter and its net loss of  $11.03 million.

Expensive Valuation

In terms of forward enterprise value/ebitda, AVLR’s 1791.23x is significantly higher than the industry average 16.28x. In terms of forward enterprise value/sales, the stock’s 18.88x is also higher than the industry average  4.37x. The stock’s forward price/sales of 19.84x is also much higher than the industry average  4.08x.

POWR Ratings Don’t Indicate Enough Upside

AVLR has an overall C rating, which equates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. AVLR has a C grade  for Growth also. This is consistent with analysts’ estimates that its revenue will increase 28.4% for the current quarter, ending March 31, 2021, but its EPS will decline 120% for the same quarter.

The stock also has a C grade  for Momentum, which is in sync with its 21.7% gains over the past six months and 15.8% loss over the past month.

We have also graded AVLR for Value, Stability, Sentiment and Quality. Click here to access all AVLR’s ratings.

AVLR is ranked #69 of 105 stocks in the D-rated Financial Services (Enterprise) industry.

Better than AVLR: Click here to access 16 top-rated stocks in the same industry.

Bottom Line

The demand for AVLR’s services is expected to increase in the near-to-mid-term as technology becomes much more advanced. However, given the fact that the company is still incurring losses, its sky-high valuation doesn’t seem to be justified. So, we think it’s wise to wait for better entry points to scoop up the stock.

Click here to check out our Software Industry Report for 2021

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AVLR shares were trading at $148.24 per share on Tuesday morning, up $1.97 (+1.35%). Year-to-date, AVLR has declined -10.10%, versus a 6.29% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...

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