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Vertex: Nothing Too Special

Apr. 04, 2022 3:20 PM ETVertex, Inc. (VERX) StockAVLR2 Comments
Kempano Investor profile picture
Kempano Investor


  • Vertex is a tax technology company with 40 years of experience and with more than half the Fortune 500 in its customer portfolio.
  • With its strong competitive position, Vertex can easily achieve industry-like growth rates, but not higher than that due to limitations in expanding its customer base.
  • The company has a low EBITDA due to large investments in R&D and marketing and sales.
  • I calculated a forward EBITDA multiple by combining its current valuation with expected growth rate and expected EBITDA margin. Comparing this multiple to that of the average of the US market, I conclude that an investment now in Vertex is not worth it.

Busines using a computer to complete Individual income tax return form online for tax payment. Government, state taxes. Data analysis, paperwork, financial research, report. Calculation tax return.

Khanchit Khirisutchalual/iStock via Getty Images

Investment thesis

Vertex, Inc. (NASDAQ: NASDAQ:VERX) deals with limitations in its growth prospects and has a low EBITDA margin. For these reasons, I don't think its value ratios are justified and believe it's currently not a

This article was written by

Kempano Investor profile picture
I believe that the goal of investment analysis is to basically assess the risk/return ratio and conclude whether an investment is under, over, or correctly valued. I do this by first categorizing the specific investment (value/growth/other), following by an extensive analysis that would fit that category. Such an extensive analysis would consist of as many as possible relevant qualitative and quantitative aspects that might impact the return and or risk of a specific investment. I especially like writing about undercovered stocks. It fascinates me to unravel the mystery and potential of such a stock. However, I also enjoy switching it up, learning as much as possible about all types of investments, types of risks, types of returns for all types of investors. The markets have too many interesting investment opportunities, that it would be a waste to just focus on a small part of it.  My goal is to fairly, extensively, and accurately analyze investments and present them to my reader in such a way as well.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (2)

I would not invest in this company. It does indeed have an extremely conservative and financially oriented leadership team who have always been very content milking its customer base with small incremental improvements to their software, and annual price increases, for slow to moderate growth. They are innovation laggards, and have consistently failed over the years with their strategies and growth initiatives. One might say that the IPO was a success to the extent that it very richly rewarded its ownership and leadership, far beyond any history of actual company performance would justify, due to the dysfunctional tech market bubble of the past few years. The current stock price is significantly below the IPO price, and will likely fall further, as it is now a more accurate reflection of the value and prospects for this company, in my opinion. There are many other more worthy and promising companies to invest in.
thedello profile picture
I respectfully and strongly disagree with this article which falls into the trap of comparing Avalara to Vertex when the companies report their numbers differently and have made very different strategic bets on growth.

I believe that Vertex has been consistently very conservative in its projections and is also very conservative in its accounting.

During the past year Avalara redefined customers to add thousands of new names without adding revenue. Avalara backed off its claims that it would make inroads into the larger enterprise market in the near future. Avalara also announced it would take non-related acquisitions and count them as organic growth for the coming year.
Unlike Vertex, Avalara shifts the costs of updating its tax database to R&D shifting millions out of costs of goods. In addition Avalara amortizes certain sales commissions over 6 years.

By contrast Vertex is extremely slow to recognize revenue from cloud sales. One reason for conservative accounting at Vertex is because it has such strong relationships with the 10 largest accounting firms in the world that they all consider it a conflict of interest to audit Vertex.

Vertex works closely with the IT departments of the largest firms in the world and has deep relationships with Oracle and SAP and the key vendors to the enterprise market. That market was slowed down by Covid and economic uuncertainty now there is a hidden backlog and delayed growth that will really benefit Vertex in the coming years.

Avalara does not have the capability or relationships to succeed and has a very steep investment curve ahead if it hopes to get any for any meaningful share of the enterprise market.

Meanwhile covid has initially worked to Avalara's advantage as well as the growth of the need to report and pay sales tax out of state. Vertex got some extra revenue from existing customers, but now a number of the best paying customers in Avalara's core market are graduating to Vertex. Vertex has invested in cream skimming the upper middle market and has also established new partnerships that will sell into the lower ranks of the Avalara market base.

In short, Vertex is already doing much better than casual analysis shows and will really begin to take off this year and keep going. I look for both companies to show strong first quarters, but Avalara's will be expected and Vertex will greatly exceed expectations.

My current target for VERX is $25 by mid year and steadily higher for the next few years.
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