Vertex Should Benefit From a Renewed Focus on Globalization

Vertex (NASDAQ:VERX) reported fourth-quarter and full-year 2020 earnings on March 10, 2021. The results were good, but investors don’t seem to be that impressed. In early morning trading, VERX stock is down over 10%.

This could simply be a “sell the news” scenario. Shares of Vertex were looking a little overbought. However as the VERX stock price has moved below $30, I think it’s time for investors to give the stock a closer look.

A great earnings report by any measure

For the quarter, Vertex delivered $99.5 million in total revenues. That was up 15.7% on a year-over-year (YOY) basis and comfortably beat last quarter’s $94.61 million. The company was also seeing YOY growth in annual recurring revenue (ARR). In this important metric, Vertex posted a 13.6% YOY gain to $316.4 million.

In terms of earnings, the company reported non-GAAP diluted EPS of eight cents per share down from 11 cents per share the year prior. Adjusted EBITDA margin of 19.1% was in line with the prior year’s 19.9%. And Vertex posted free cash flow of $30.9 million.

The results were equally solid for the full year. Vertex reported a 16.5% YOY gain in total revenue, checking in at $374.7 million. The company saw software subscriptions increase by 14.9% YOY. And the company posted a 13.6% YOY gain in ARR.

So what’s the problem?

Basically, it comes to this. It’s true that taxes are as certain as death. And tax software is literally integrated with a company’s operations. And by all accounts, Vertex is doing a good job of retaining its core customer base (although the company did acknowledge some churn on the lower end).

But at its core, tax software is not an exciting business. And as an article in Seeking Alpha revealed, the company acknowledged that it needed to modernize its product. That’s not generally something you hear from a company that just went public. But it’s the other side of the coin for a company that describes itself as a pioneer in tax automation.

However, the company is taking steps to resolve that issue, most notably with its acquisition of Tellutax in January 2021.

Why Globalization May Be a Catalyst

Vertex specializes in helping companies manage complex tax operations dealing with indirect taxes. This category includes sales tax, seller’s use tax, consumer use tax, and value-added tax. This is a category that gets more complex for international companies. This is because countries have different reporting requirements.

During the Covid-19 pandemic we have felt and are still dealing with the consequences of a stretched supply chain. The America first agenda implemented by the Trump administration had a stated goal of increasing the percentage of corporate supply chains that resided inside U.S. borders.

However, as the saying goes, elections have consequences. And so America is veering back towards globalization. That may very well be a catalyst for Vertex.

Vertex has been around since the 1980s. However, the company only went public in 2020. In some ways, the company couldn’t have picked a worse time as businesses were delaying purchases of enterprise software due to uncertainty surrounding the Covid-19 pandemic.

But as the pandemic eases, analysts believe this could create “pent-up demand” for the company’s tax software. Plus, if businesses return to, or enter, different countries to extend their supply chains, they will have to account for the tax reporting requirements of those governments.

Buy the Dip on Vertex Stock

The post-earnings dip in VERX stock has moved it from being overbought to likely being oversold. Investors should take this opportunity to buy the stock which now looks to have an upside of over 10%. As the world moves on from the pandemic, businesses will look to revisit their enterprise software spending. And the likely return to a more global economy should be a catalyst for Vertex.

To be sure, there are a number of other stocks that can get you a bigger bang for your buck. Those stocks also carry more risk than Vertex. Taxes may not be exciting, but they’re necessary and by the looks of it, Vertex is doing a good job of retaining its base.