If you like a classic battle between an old school, on-premise software provider versus a cloud-centric, “Clayton Christensen” disruptor, look no further than the indirect tax software market. (Yes, indirect taxes, how’s that for exciting!) Vertex is the old-school leader. Avalara is the upstart. Vertex filed to go public last week, so we can compare it to Avalara which went public two years ago.
Indirect Tax Software
If you are not familiar with this market, indirect taxes are non-income taxes such as VAT, GST, and sales taxes. These taxes are used by governmental authorities to raise revenue from consumers and retailers. If a company has an e-commerce operation of any size, for instance, they likely have to deal with indirect taxes. Indirect tax software calculates the appropriate tax to be charged, assures compliance with tax laws, maintains certificates, and more. Key players in the larger end of the market include Vertex (which has been around as long as I have), Thomson Reuters’s OneSource, Sovos (a Vista equity roll-up that includes Taxware), and Avalara. There are also many other providers for small companies.
Avalara is a classic disruptor in the sense that the company targeted the mid-market with a simpler, cloud-based solution while ceding the enterprise market to OneSource and Vertex. Avalara’s stock price doubled on its first day of trading two years ago, so I sat it out. Since then the stock has tripled again and the company now sports a market cap of $10 billion. (Pretty typical of my investing acumen.) Avalara is now larger than Vertex and growing faster. (However, as you will see below, Vertex makes money and Avalara is just break-even on an EBITDA basis.)
Last week Vertex filed to go public. Vertex practically created the indirect tax software market, but it did not add a public cloud option until 2013. That was a long time to wait.
This gap in Vertex’s offering created an opportunity for Avalara to drive a truck through and Avalara did just that.
Key Metrics for Avalara versus Vertex
Here’s my quick and dirty review of key metrics for the two companies which are both pure-plays in indirect tax:
As you can see, the companies are of similar size, gross margins, “rule of 40”, and net revenue retention. The similarities end there. Avalara is growing much faster than Vertex and is spending twice as much on both R&D and sales and marketing. Vertex spends less on R&D and S&M to deliver reasonable profits on an adjusted EBITDA basis (sort of an oxymoron I know). Vertex is “moving down” from targeting enterprise clients and Avalara is doing the opposite. Avalara has an enterprise sales team and tells us it is going to be “more opportunistic” in targeting enterprise customers.
It will be fun to watch the valuation the market gives Vertex relative to Avalara. With its lower growth rate, one would expect Vertex to trade at a significant discount to Avalara’s $10 billion market cap. Please use the comments section to provide your guess for what Vertex’s market cap will be at the end of the first day of trading. (We can’t just go with the IPO valuation since everyone seems to be dramatically under-pricing these days!) The winner will have my eternal admiration and can continue their subscription to the blog at no cost. 😉