Thats a PE of -100 there.... way to go before they even get to a PE of 100 :) :P
Printable View
back of the envelop:
DIL has flipped to profits and has a profit margin of 40% so assume XRO can do the same.
So $170 profit = $425m revenue
Currently on $50m per year and doubling annually so
50->100->200->400->800
So by 4 years, that should be more than justified with $800 revenue resulting in $320 profit so a market value of 3.2 B at a P/E of 10
Do you buy the growth story?
Disc: sold out at $7.75 and not buying back in at current prices.
Yes, I had a sharetrading friend of mine that thought similar to your dad when I was tapping him to get into Xero at $4.00. He opted instead to stay with his safer blue chips because the calculations didn't add up to the fundamentals he expects to see in a good stock. Stories don't matter for some people out there and thank god we all think and act differently. 8-)
And in 4 years following revenues rise to: 1600, 3200, 6400, 12800
No I do not buy the growth, nor do I buy the profit. No way with 800m revenue that they will be making 340m profit.
Also 100% growth is possible for a year, maybe 2 but after that no way.
Still not convinced. Look I know its a great company, great product and will go a long way. Just cannot see them capitalised at $1.7b right now. Too many uncertainties and what happens when a competitor with a superior product comes along?
The high prices are driven by high growth. Remember that these are paying customers unlike the previous tech boom which was driven by high growth in page views or unique users.
Provided revenue growth continues, SaaS companies can reduce costs (sales and marketing) quickly to turn cashflow positive in a short space of time.
Watch the growth numbers from paying customers, not just eyeballs.
I know of quite a few people who were actively talked out of taking part in the IPO or were talked out of selling their holdings early on by Brokers or even their accountants due to it being perceived as risky. Fair enough I suppose but I wonder how those people feel now. I have trouble believing brokers recommendations after some of the cock ups I have read.
Well said, CJ. I will add that such companies do not necessarily need to reduce costs to quickly turn cashflow positive. Just keep them in a stable situation and let the increasing customer base widen the disparity between expenses and revenue.
Yes, many people still have a problem differentiating between the 90's tech boom and where we are at now.
If you haven't seen it before take a look at the Gartner Hype Cycle:
http://blogs-images.forbes.com/gartn...s-Graphic4.gif
They've positioned Cloud Computing as over the "Peak of inflated expectations" and part-way down toward the "Trough of disillusionment" which they think it will recover from and reach the "Plateau of productivity" in 2-5 years.
It's an interesting model. I suspect Xero is still on the "Peak of inflated expectations". Only time will tell if it has a "Trough of disillusionment" before making its way back up again.
Interesting graphic - thanks Maddog - I hadn't seen it before.
Xero themselves are not a cloud computing supplier. Rather they use cloud computing to deliver their product (an accounting package). So if cloud computing is still on the way down then they are exposed to the same risks. What are the risks to cloud computing? I suspect security breaches and major outages will be some of the issues. We have already had a little taste of this in NZ with the recent Telecom/Yahoo!Xtra email issues.
My point there was if the US rollout doesn't work, they could scale back their US opertions quickly, and be cashflow positive from NZ and Australia. They wouldn't be worth $1.7B but they would be a viable company going forward.
I believe them using Rackspace, a specialist provider, decreases the risk of this rather than them doing it inhouse.
That is good news - Rackspace are recognised as one of the industry leaders in the managed hosting and cloud infrastructure markets.
http://www.gartner.com/technology/re...t=130412&st=sg
The same goes for any company. Apple is a great company but its share price has dropped from $700 to in the $400.
Buffett tries to find great companies that are undervalued. So while XRO may (or maynot) be a great company, I personally feel it is currently overvalued. I will reassess when the next customer data comes out.
Turmeric
Can you please give me some examples of companies that have grown rapidly while at the same time losing a lot of money, then cut costs (presumably getting rid of a lot of staff) and achieved profitability.
I can't think of any significant examples but there may be some. I would have thought Xero's plan will be to stabilise costs while revenue keeps on growing and eventually outstrips the costs.
At the moment costs just keep on going up ahead of revenue and have done so for six years. Eventually, if Xero is to be successful in the long term, that has to change.
Thanks CJ
There are many examples like Facebook. Amazon is I believe another.
However, I keep seeing people saying Xero will grow and then cut costs to achieve profitability. I just don't buy that strategy. The companies that cut staff are ones that are in trouble. Once you start cutting staff, customers are much more likely to lose faith in a company and good staff leave seeking more stable opportunities elsewhere.
My view is that if Xero is to be successful it has to change to a pattern where revenue growth outstrips cost growth. So far they have not shown they have the ability to do that or given any plan for how to do so. In the meantime investing in Xero is an act of faith.
NOt that much of a parrallell but does anyone remember a company called Nokia from 4 years ago?
Maddog - it was probably me who said they could cut costs. But that is a worst case scenario with a (say) 5% probability. They have a good track record of tapping new equity when they need more cash to fund growth.
Hi Turmeric
Just going back to your 4.22pm comment yesterday that: "for the last financial year revenue grew faster than costs":
In percentage terms you are correct - I just did a quick calculation and Xero's revenue grew by 101.5% whereas costs grew by 96.1%.
In absolute terms it was the other way around. Revenue grew by $19.66m whereas costs grew by a considerably higher $26.202m. That was what was behind my earlier comment that at the moment "costs just keep on going up ahead of revenue". For Xero to ultimately prove to be a successful company that gap has to close.
And CJ - I agree that Xero has a great record at raising equity. In the short term Xero is in no danger of running out of cash despite its negative cash-flow. However, equity eventually wants a return. If it doesn't the equity of savvy investors finds another home. Xero is flavour of the month at the moment. That won't always be the case unless it really is different this time.
On the subject of Rod speaking out
http://www.nbr.co.nz/opinion/rod-dru...antir#comments
Funny stuff
Hi Turmeric
Yes we did use slightly different numbers - we obviously didn't include exactly the figures for the minor stuff like interest and tax.
It is possible to interpret Xero's numbers in many different ways. You focused on percentages to conclude the gap between revenue and expenses was closing. I focused on the actual $ gap to conclude the gap was increasing.
Using your numbers (from post 1801) the gap between costs and revenue in the year to 31 March 2012 was $9.4 million. In the year to 31 March 2012 the figure was $15 million. If I extrapolate that trend the gap is increasing - and based on Drury's comments about doubling employee numbers in the coming year I think the gap will probably increase again.
However, extrapolation is only moderately useful in this case. For Xero to be truly successful it, at some point, needs to have a step change - a break with past trends so that revenue keeps on increasing rapidly while costs plateau or only increase slowly. What I want to hear is how Xero is going to do that and when, and so far it has given no indication of what it intends to do.
My argument yesterday was with those who argue that Xero will become profitable by cutting costs at some point. I think that is incredibly difficult for it and most unlikely.
Cutting costs may be a bit to far but how about a cost freeze. No new hires. Costs stay constant.
Those same people should be able to maint the growth at the same constant rate - especially since they sell to Accountants who sell to their clients so there is a bit of a time lag there.
I'm kicking myself. I was watching DIL at $2.20. Feel a bit reluctant to get in now.
My personal opinion is that Xero has the bigger opportunity with its potential market size, but obviously DIL is already profitable so easier to label a success by normal metrics....
I’m invested in both Xero & Diligent. My average price for Xero is about $1.03 and I was able to buy a lot of my shares between 70 to 83 cents. I bought majority of shares in Diligent for 1.09 after selling Charlie’s shares for 0.43 (Great timing) Then I bought more at $3.79 last year after selling my Fisher & Paykel shares. My average price in Diligent is about $1.86
I haven’t sold any of my Xero Shares. I’m unlike to sell any of them for at least another 2 to 3 years. I’m not worried about the daily / monthly fluctuations because I believe this stock will be worth a lot more in the future. My opinion can always change, but as long as they keep executing their plan I will hold on to them.
I don't understand the upswing but I'm not complaining. Moosie promised $150 target so expecting that to come up this afternoon?
It is almost sickening to look at the one year graph and contemplate why I sold.
At least I picked one of the peaks that held firm for 3 month before getting blown away in the lastest onslaught.
Does anyone know when the next customer numbers it to be released - or any information at all that could justify the climb.
1 April or just after would have to be a big sign up day for NZ based businesses so they should get a bit of a spike there.
The Deloitte partnership in Australia should show some quick gains one would have thought.
And the US efforts be starting to net results
So my guess is they will have 200,000 customers by then as it isn't really that much of an increase in customers compared to the last period (remember, their growth needs to be near exponential to justify the $16.10 it has hit today (currently $15.90))
No but then I have been out and decided not to look at it again till the price dropped (that never happened).
When I bought in, I did a back of the envelope which I am sure had customer numbers doubling each year (I think I was actually looking at revenue but pretty interchangeable) and with costs leveling out in a years or two's time. That sort of model is fine in early days( 25->50->100->200->400->800) but once you hit say 1m customers, you dont expect to hit 2m the next year. My mind wasn't bright enough to figure out what the terminal growth rate should be at that point (a few years of 20% then down to 10%???)
Look at the small graph on the right of p6 (and yes I know the far right bar is a goal) or the revenue graph on p10 to see they are currently executing to plan https://www.nzx.com/files/attachments/175830.pdf
To be able to keep implementing to plan, they need to scale into the US so I'd be looking at those figures. Page 33 is also interesting as it shows the US isn't as important as I think.
If I was holding, I would be tracking the numbers for each region to see how far away that goal of 1m customers is and if the growth is still going strong or petering out to figure out what that terminal growth rate should be.
$16.21 this morning. A new record?
In a way the fact that DIL, PEB, ATM, SNK, SLI have not performed that well and XRO has is a good sign. It would be strange if all these stocks rose sharply (would make me think it was a bubble). But what Tumeric is saying makes sense. The reason XRO stands out is that it probably does have the right mix of management, innovation, perserverance etc to be a good stock.
That said, still think that this is a ridiculously highly priced stock at present and would not touch with anything. Time will tell who was right and who was wrong. Prepared to eat my hat if need be.
There is a very positive article on Rod Drury in the latest issue of the Listener which came out over the weekend.
Back on the XRO train...
Offloaded half my holding on Friday and I must admit it's frustrating to see a pop like this. We all know XRO can be irrational long after you can remain solvent ;). Can't discount buying in again though.
Interesting to see how much it has decoupled from a very high correlation with DIL over the last 2 months as well.
I sold a small amount of my shares in Xero today for $16.28 and used that money to buy more shares in Diligent for $6.97
AGM is on 1 July. I believe that there is usually another boost after this particularly if they do announce another milestone or development. I would be hoping to see a customer number in excess of 200,000. They usually announce the numbers current to the day of the AGM.
I have been speaking to a lot of accountants and bookkeepers lately and the impression is that Xero is streets ahead in terms of usability than any of its competitors.
I was one of those (still am if I'm honest) ....but no backlash from me Turmeric. Far from vanishing though, I watch with eye watering interest as I am keen to further my education in respect to "how to accurately value a share". No matter which way I try and understand the meteoric rise of this firm (both FA & TA), I cannot for the life of me reconcile with myself that it is nearly a $2b company. To me, the SP is being held up with nothing but bluster, promises and of course key shareholders with very, very deep pockets - but with still a long way to go to turn a profit. At some point, it has to perform by trading financially on its own - not via introduced funds. Disc.... I'm a happy bystander with no financial interest here.
Now I await the inevitable backlash ..... "Hi Rod ..."
XRO market is huge but then it only sells for ~$500 year. DIL market is smaller but it sells for ~$20k+ per year.
Imagine if DIL expanded into Govt (local and national):
-It is sad but when Paula Bennetts house was on fire the other day, the only think she saved were her cabinet paper - if that was all on an iPad, no issues.
- Imagine if the GCSB report was on Boardbooks - would Dunne still have leaked it
I have read people comment that even board of trustees for Schools would benefit from the product (though couldn't afford it)
I suspect Theil is either talking it up to US funds, or US funds are jumping in on the back of Theil - they would have read Drury comments that it will hit the NASDAQ as soon as they get $100m in revenue so they know it is coming their way.
have you heard of a company called Facebook? Market cap of 60billion, EPS of 0.02c, PE of 1240. Zynga has $2bill M/cap and a -0.16eps.
Yahoo, you have probably heard of (sic) .... $27.5billion m/cap with $3.40eps and 7.5p/e. I could go on but got work to do. 8-)
I am not goign to say a NASDAQ (or whatever) listing will fix all ills, but I do see going into a market that is more sophisticated in this IT area as a good thing and good stocks will be reflected in their SP performance there.
I know Xero S/P seems toppy to mean but I think the same conversation will be had when it goes past $20, etc. Lets just wait to the AGM to decide if the S/P has indeed gotten ahead of itself. If they keep delivering on their story, at the AGM, then imho, it hasn't.
Doesnt anything that is material have to be announced to the market anyway? So no real news can be given at an AGM? Or am I missing the mark here.
yes, updated customer numbers (and breakdown per region) will be a good gauge that they are continuing to deliver on their story and build closer to their 1mill goal. I am not expecting any other big announcements or hints, like listing in USA, etc. From the AGM I like to 'read' the Xero management and get a feel for their continued passion to realise what they envisage. I feel more can be gained from attending than reading a summary of events.
I agree Dellow. I try and avoid anything with a cult mentality or Amway style arm waving but I always come away from the Xero AGM with a good feeling about the company. They are always so certain about where they are heading and deliver a professional presentation everytime. My favourite part is always the customer numbers as this feels like the right "barometer" to me...as long as they are still attaching fees to them.
KW
Providing that the can continuously announce increased customer numbers and give their believers a nice warm fuzzy feeling after attending the AGM, then long financial viability is so unimportant.
Best Wishes
Paper Tiger
So I look at $16.40 a share and a market cap of $1.9 Billion and I says to myself in order to justify that then they need to be making some real profits down the line.
I do some modelling over a 10 year time frame, and that's a long time to look ahead.
I try a few sensible scenarios and I try a few really silly ones but the underlying result is much the same and the essential question always seems to be:
In five years time, 2018, will they be generating a profit over $210 million? :scared:
And the answer I believe is No. :t_down:
But the current technicals are still excellent :t_up:
Best Wishes
Paper Tiger
If Xero keeps doubling its current revenue@Mar 2013 in the next five years and manages to create a profit margin at 20% at year 5, their profit will be just over $210 million. The customer number will be 2 million by then. Hm.. sounds very challenging. is it really "xero" chance to achieve it? Maybe 10%, I bet. :p
CEO & CFO ... then COO & CPO ... so the pattern should next continue to CYO & CZO ..... acronyms are cool.
I wonder if it will reach $17.07 today, it will then become 2 billion dollar company.
A small article around Xero's share price. Definitely pushing the idea that you can't value it like a traditional company. See the comparison with F&P Healthcare. I am guessing that the big differentiator is the size of the potential market for this type of Saas company.
http://www.radionz.co.nz/news/busine...d-$16-point-75
Having said that it would be nice to see the costs stabilising but I guess the relentless quest for size will delay that...
http://techday.com/it-brief/news/xer...0-jobs/165390/
I disagree
The US buyers are now on leave - they close up early on 3rd July for the 4th. And given the 4th of July is a Thursday, a lot of them will take off the 5th as well to make it a long weekend. The Hamptons will be busy!
Wow it didn't just limp to $17 it went right past to $17.05. Almost $2 billion. 2 more cents.
$17.40 wow speechless. it feels as though everyones just like screw it as long as the share price is oing up everyones making money. keep it that way regardless of whats going on. and yes im sour because ive been in twice just within the last year and only sold out for small profits
Its different this time and the market will never go down...the taxi guys at the rank outside told me this...
I've pulled you up on this one before - XRO has no debt, it has enough cash in the bank to continue running losses for about 2 years. If it decides the current high growth/cashflow negative approach is still justified, it will raise more funds before it runs out (my guess is they wont get any debt until they are profitable).
While they are adopting a high risk strategy, they are doing it right and implementing to plan (so far).
Good post CJ. Whilst the are implementing to plan I am happy with their strategy and the money that is necessary to spend to become a leading global cloud-accounting solution. I also look at a large amount of the increased spend is for the hiring of developers/software tec's which translate to an ever improving product which translates to distancing themselves from competitors. Pedal to the metal.
Call me mad but I actually topped up at mid $15's. And will probably do so more as they deliver to plan.
As I said before understand a SaaS business model before making silly comments.
These models are very common overseas. Read up on Google, Amazon etc and understand what Xero is trying to do and why they have chosen this structure.
http://www.stuff.co.nz/business/indu...-value-tops-2b
Excerpt - Chief executive Rod Drury's 18.5 per cent stake in Xero is now worth $377m. However, the stock would inevitably suffer tremendously were he to attempt to suddenly cash-in that holding given his own importance to the company he founded.
Dah. Almost laughable journalism.
Jeez. $17.50 up now. Maybe no psychological barriers until $20?
I was just watching Midday Finance News on TV1 and someone from Craig Investment Partners said it could be worth $40 per share in 12 months time.
Sold out just under half about 3 months ago at $11. A quick check shows that I gave away a years after tax salary. I know you shouldn't focus on these things but....and I know it could easily go the other way but.....
I wonder how many of the big managed funds are invested here ... and how many are kicking themselves.
It's been an amazing ride. Got in on the game last year when it was at $3.60.. I always knew it was heading to this market cap and beyond but had no idea it would do it at this pace. Just seems to be snowballing.
I have an email to my partner suggesting we sell our 50000 gag we bought in1996
And buy Xerox at 2.2.2.275..... no reply duh
The only thing I am still concerned is these guys are only anX X away from being the next Xerox
Pols for the fat fingers but u get my drift.?
Seriously! Use the edit button.
I wonder if any of the current buying is by NZ funds. While there is no requirement for active funds to hold shares based on the index, there performance is compared against the index. Not holding the top performing share in your comparison index must put a lot of pressure on the rest of your investment decisions!
Usual amount of vitriol on the NBR comments section. Do people really think that the poor mums and Dads are going to get burned on this? I can understand that it may all turn pear shaped tomorrow but my take is that the Mums and Dads are over at MRP getting burned there. Xero investors generally buy the story and realise that its risky.
Anyway an article on the Herald suggests that this is the year of aggressive marketing in the US starting with Xerocon in San Fran to coincide with the Americas cup. Wish they wouldn't call it XeroCON. Maybe XeroGOOD or something....
I think it could easily just crash through a sudden loss of confidence. However the Herald article quotes Brian Gaynors opinion that the price is being driven by tech savvy investors in the US who are interested in the rise of customer numbers rather than traditional measurements. They of course could be completely wrong but it makes me feel good that Xero is getting support from one of the biggest economies in the world...
Disagree, Moosie. What if they keep on delivering and this thing is only just getting started?
Sure bad news will cause a correction, but don't expect a calamity. Just an entry point, maybe.
http://www.nzherald.co.nz/business/n...ectid=10894859
They will need more cash in a year or so the new issue will dilute them some more. What is disappointing is last time they did a capital raising, they only did a placement, not a SPP for all shareholders which would have increased the liquidity.
Some of the big shareholders also took the opportunity to sell down in that placement too.
$17.97 hit this morning. I wonder if we will see $18 today? I would love to know who is actually buying.
Can I ask how a regular layman gets access to the real time pricing like you guys have?
Revenue $39 million, profit -ve14.4 million, market cap 2,000 million!
So what's the market saying - the turnover will go up 25-fold to $1 billion and profit up to $150 million in the next few years? Or better?
The chances of that seem small.
The chances of this loss-making company getting out-competed by established companies and going bust seem far higher.
I use the Direct Broking trading site. Lots of useful stuff like depth and historical pricing charts etc.
www.directbroking.co.nz
I agree that it is a difficult proposition. The positive here seems to be the execution so far and the customer acquisition approach of using the accountants to generate the customers by effectively changing over whole practices. A lot of companies hitching their wagon to this delivery system makes it reasonably sticky.
It doesn't hurt that they have won just about every award possible for a software company.