How does the value investor value Xero at the current price? What E number is needed to justify the current price in the future? How long would you wait for this number?
Intuit is Xero's incumbent in the US market; it trades on a P/E of around 25. Xero is $3.6b odd, so the market forecasts future earnings of $144m. Intuits margins have been quite consistent for the past 5 years, around 20%. Xero $144m earnings on a 20% margin base is $720m in sales.
Average annualised ARPU is $334, so 2.1m customers at $720m in sales. What growth rate over what period is needed to get 2.1m customers? March 2012 NZ growth rate was 20% per quarter, but has now fallen to 8% Xero's 86k representing a 30% market share of the estimated SME market of 250k, in March 2012 this was 12.5%.
US quarter growth in past year has fluctuated between 20%-30%. Potential US SME market of 10m, so Xero grows at current rate (25% quarter, 140% p.a.), for 5 years, would be 2m US customers from today’s 16k, this gets it to 20% market share.
At $40 a share, there has to be higher margins, higher penetration, or higher growth rates.
Paying a lot already for revenues to increase 1000%, and then for these revenues to deliver an operating margin of 20%, but hey, it’s different this time…