Have grabbed a copy of 1) for now, will have a read. Cheers.
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Have grabbed a copy of 1) for now, will have a read. Cheers.
It was totally unwarranted based on fundamentals, for christs sake, it was the 2nd biggest company on the NZX for a period, based on what??? Hype, speculation and a product that is actually not up to scratch.
Why should you be relying on others to say don't buy - if you're not able to make and own your own investment decisions, then might I suggest the stockmarket is not for you. You need your big-boy pants on when playing with these hype driven stocks. Perhaps you should be looking at some more stable stocks, that aren't going to have spectacular increases, but pay a steady dividend.
Who really does know where the value is, but, for one it never was at $45. Sit down with all of the available data, projected forward earnings, set some KPIs on the company and see if they are achieving against measurements, from there, make an informed decision on what you think the value is, not some wally in the media interviewing their keyboard. Read the Xero community and see the mountains of frustration from users about how long it takes them to implement changes. Understand that they have a very poor back-end that is going to hurt them in the long run.Quote:
I just don't know where the value is in this company any more.. Rod I think it was was expecting a around $25 price.. I figured this was safe? Maybe some bouncing around the lower twenties?
The charts are your friend. I can't be assed going back and looking, but the charts for this stock have been screaming get-out for a helluva long time. Maybe someone does want it dead - or at a lower point than you so they can pick up stock cheaper than you. The market makers have bigger pockets than you can ever dream of.Quote:
If I had known there was this much of a drive down.. It's like someone wants it dead.. a quick bit of news and it spikes up then it just gets dragged down further and further like everyone's forgotten it was even trading there or the news ever mentioned.
As I said above, use the charts and get out. Capital preservation is the number one rule in playing the stockmarket.Quote:
Now I'm at the same position I was four months ago.. will it hold any sort of value at it's current rate or will it tank further? My gut tells me it'll tank..
Yet I still hope it won't but if this has taught me anything it's this.. don't ride on hope.. but it's so bloody hard not to..
The first rule of the internet: "Don't believe everything you read on the internet" Most people saying this are full of themselves and have no intention of buying at low prices, other than to average down their losses. The smart money doesn't go around saying this.Quote:
Then you got the ones cheering on $10. Woot! drag it through the mud! I'll buy at bottom dollar I'll get filthy rich!
Sorry buddy, but you gotta own your decisions. Until you do, you won't learn a thing.Quote:
Yeah off other people's backs mate. Not sure what's more sickening TBH. But then this was happening at $30 for $17.. and look how that played out.
Yes, it was a bad move to consider this long term - but, all the information was there saying this wasn't a long term play, well certainly not at the levels it was at. Furthermore, why on earth should the NZX stifle the market. What happens if they stepped in and you missed out on a big gain? Would you be crying out for them to regulate gains? Not another one who thinks the government should be involved in every aspect of our lives, are you?Quote:
It was a bad move to even consider this long term... hard to believe it rode so high on market sentiment.. you'd think the company or the NZX would reign it in..
Anyway...
Well said Mattyroo.
The market is a good teacher if you are prepared to listen
Can see both sides of the story that Ryrynz and mattyroo are telling. Definitely have to own your decisions, but it's of course frustrating seeing stocks plummet over what you feel seems like nothing. But it's equally amusing to see them lift off when there has been no news or announcements. I've been trading for about 9 months, with what is essentially loose change so I can learn the ropes, and had some wins and some losses but learnt a lot.
I bought Xero a few weeks back when it plateaued, just before the avalanche. I bought for the long game though so doesn't bother me at all. I believe in the product and that they'll acheive their long term goals so just gotta wait and see.
Exactly. We're essentially just along for the ride. Hop on when you're ready and hop off when it gets too much for you
Ultimately the valuation formula is always the same. You work out the present value of the discounted stream of future cashflows. SaaS companies are different from others in a couple of respects:
1/ They can have low incremental operating costs while gaining new incremental business.
2/ They are often in the early stages of growth.
That means that, in theory the tipping point between being a loss making start up and a profit making new era company can happen quite quickly. Thus if you use 'conventional' valuation methods you can find that what does not look promising using snapshot statistics can develop into a company of real value. This is where valuing a company on 'revenue growth' comes in. A fixed cost structure and growing revenue should ultimately lead to a profitable business.
It is the end point that will determine the ultimate valuation of any SaaS company. Growing revenue, when there is no real chance of a profitable outcome does not mean an SaaS company is worth anything. Revenue growth must be a conduit towards profitability for any company to have value.
It follows then that the "multiplier for revenue" investors are seeking must be tied to how much incremental work is required to gain new customers as the SaaS business expands. It will not be the same for every SaaS company. And if the cost of acquiring and maintaining new customers becomes too much, then the multiplier is "0".
I am not suggesting that Xero has no value. But I would like to know if Xero is currently profitable in New Zealand, or could be profitable if R&D was wound back. Given NZ is the most mature market, that might at least give a starting point as to how revenue growth in other markets will eventually lead to profits being made. Inventing new ways to value companies ("It is different this time") unrelated to profitability is always a recipe for ultimate investor capital disaster in my experience.
SNOOPY
Snoop Dog - Xero has a 65% Gross profit margin so I am sure it would be profitable in NZ if operations were wound back to support only NZ.
The issue with discounted cashflows is that so much of the value is held in the terminal valuation. Theil is on record as saying transformative companies (I assume that's why he invested in Xero) have over 80% of their value generated beyond 10 years. He has seen this with Paypal and many others. Makes DCF models very hard. Look at the posts by Lance Wiggs on the Xero (he did a refresh of his quick valuation yesterday).
The expansion_into_America problem is nothing new...
Xero needs to set up an American_only office with American_staff and migrate the code to American_operations, before the narrow minded mistrust of anything not made_in_america will even give it a chance.
And for goodness sake DONT let a NZer accent blab all over american tv advertising the product.
Yeah I have to say I think this analysis is pretty misleading.
Xero chucks all the general and administration and development expenses into corporate - nothing is allocated.
Xero could not operate in NZ if it did not have people on the ground supporting accounting firms and in relationship type roles. What % of the $30m was this in 2014 - who knows? Quite a lot I would have thought.
Also, thinking you can just turn off R&D is not realistic - software needs to be constantly updated.
So in short, I dont think Xero is making a profit anywhere... ASk Xero to allocate out the NZ R&D costs and General & admin costs to NZ, Aust to AUst etc at the next AGM because what they are presenting at the moment is completely misleading.
If anything, the thing that could be shut off is the sales and marketing - yet that is allocated out.
G&A is $12m and R&D is 18m.
For R&D, you could prorata against users or you could argue you should apply it to the first user (ie. NZ) as you need to do the same regardless of numbers. I would however assume that a large part of that relates to country customisation (ie. taxes) so even if NZ only, it would not be that much per year. Allocate say 20% is $4m
If it was a NZ only company, G&A would be alot lower. My guess would be max $2m. By comparison, RBD G&A was $7m for the half year on Revenue of $180m. Xero would be run very differently (ie. Lean) if it wasn't aiming for world domination.
Have a look at MYOB and how many people they have to dedicate to talking to accounting firms, creating templates and customisations for the mid tier and larger accounting firms, dealing with queries - your $2m is insultingly low. I set up businesses and SPVs all the time - your numbers are ridiculous.
I've just had a look through the 2014 annual report (pages 7-9) where the expenses are broken down. I think you're a little off-base in that the reason the R&D and admin costs aren't split across countries is because they can't be directly attributed to earning revenue in those countries. It's just not possible.
As a quick breakdown, the expenses were:
Cost of revenue (35% of operating revenue)
Sales and marketing (79%)
Product design and development (49% total/26% expensed)
General admin (18%)
Total (181% of revenue)
The first two of those expense categories are split at the country level to provide a breakdown for each market. This seems reasonable to me because as sales in a country increases, those particular expenses will also increase, or in the case of marketing as that increases hopefully sales will.
This isn't the case for product design or general admin. Much of the costs for product design will be spread across all customers although a portion of it will be for customising for particular markets. I would like to understand what the breakdown of these vague categories actually means though. The annual report is a little lacking in specific detail here.
I think that the figures given by Fisherboy do give an accurate picture of the state of Xero although it really is worth have a look at the relevant part of the annual report to get the full picture.
I think that the $2m that Harvey is talking about is General Admin. I guess that this includes things like HR and building management etc.
If you are talking about "talking to accounting firms, creating templates and customisations for the mid tier and larger accounting firms, dealing with queries", this would all come under the other three categories (COGS, sales & marketing, R&D).
Sales and Marketing is allocated to Country so those costs aren't included in G&A. MY G&A would cover rent (no need for fancy Wellington central offices - a small office in the 'burbs will do), CEO, CFO, Accounts receivable and payable, receptionist (given how fantastic Xero is, the Receptionist is dong the AP and AR). I forget to include accounting software so add in an extra $600 year, though they would get a discount from going through their accountant. I was also assuming it was unlisted.
I'm basing this off a company with turnover $10m+ and over 100 staff where G&A is ~$1m so thought I was being generous.
correct
No one messes with Harvey Specter!!!! ;)
You boys still knocking XRO? If you were consistent you would spend more time on a company with NO revenues like PEB instead of one that is increasing 80%+ year.
Pro tip: Don't day trade XRO you are wasting your time.
Somebody suggested to lighten up. This one is good for a chuckle, I think:
https://twitter.com/CloudAcctsToday/...16795686912000
Yeah, it was more than as per this pic would show pic.twitter.com/yJmCnMgdRr But how would Xero reacts too when it's Intuit chance to gate crashed a future Xerocon?
Rod wants you all to read this
http://www.forbes.com/sites/tomtaull...tment-in-xero/
Could this be a social behavioral definition of a knocker? .....A messenger citing what is happening in reality to people who want to believe otherwise..
Nope, that would be a bear, a knocker would be someone who gets their jollies from unnecessarily scaring newbies and generally just crapping on shareholders because they have ego’s big enough to think they can actually influence and down ramp the market, just pathetic really.
Knock knock.
Who's there?
Ostrich.
Ostrich who?
Ostrich my arms up to the sky!
I believe that we are transitioning to anger. For the sake of constructive discussion it's probably more important than ever to leave emotions at the door. Right now nothing suggests the stock is grossly mispriced. We are where most analysts see it. A 15x forward revenue multiple can only be seen as a lot of confidence in continued growth. Those who believe that acceleration/slowing of growth is a foregone conclusion should wait for the next numbers update, I think.
Well said Casino. I think when people get emotional about comments on a stock it probably means they are over committed and should look at their investing methods and see if they really are in the right game. Also the term stock knocker etc is probably bandied around incorrectly. It should probably be "price knocker". Ie at these prices I am bearish on XRO. However if XRO was priced at $5 I would probably be bullish on XRO. I think XRO is a great company with a great product but at these prices will not buy as I think the market has overvalued and over hyped it. That is just my opinion. I may or may not be wrong and only time will tell. People that get affected by posters "knocking" or "hyping" a stock need to chill out. If you are convinced of your research/conviction what does it matter what some other random pseudonym has to say about that stock?
I don't buy shares like XRO but got to wondering how to value shares like this.
Valuing shares on multiples of turnover seems optimistic. Especially forward multiples of 15.
Even if 'analysts' are using the same screwy methodology - could be they're all deluded. Like they were in the mid '80s with Chase, Judge etc.
Say XRO is trading at $15, for simplicity.
That makes its forward turnover $1 per share.
Say it managed to make a 30% margin on its forward turnover - like it stopped trying to expand and just tried to make a profit.
That would make 30cps profit.
Say you valued XRO on a PE of 15 on this putative profit. Then XRO would be worth approx $4.50.
Even at $4.50 I'd call that a high risk speculative purchase deserving no more than 1% of equity invested. And even then, to be traded cynically, using TA with well defined entry and exit points, and deep stops to cope with its volatility.
I’d be cautious for those tempted to jump back in boots and all, the best advice I could offer is to throw away all those ‘back of a cigi pack’ calculations for some DCF sensitivity analysis on both prospective customer uptake and the timing of that uptake.
But, if you are going to do it, I feel my post from last October, this time last year, still remains valid;
With IT tech stocks I guess it comes down to risk tolerance and beyond that to ones exp and ability to gauge and calculate the sensitivities and likelihood of possible outcomes.
I would agree though Black Knat, for most inclined toward more rather than less predictable outcomes, DIL would make for a more stable investment than XRO, still nicely undervalued also.
I don't hold either, would like to see a strategic plan presentation from DIL for that cash pile before considering taking a long term position again.
I think the historical metrics of salesforce from 2004 to 2014 using Morningstar are VERY relevant here because it includes investor fear/greed so it combines valuation metrics/investor emotions and a very similar growth pattern. If you play around you can flick your eye over 10 years of statistics easily on a table.
I'd be interested in any reasons why xero should deviate from this especially from the relevant 90mil to 1 billion revenue period (ignore 2008 to 2010 because of GFC)
I take it you have seen this report from Clare Capital circulated last year. He did a few comparisons with salesforce as well.
http://clarecapital.co.nz/cc-content...s-20131003.pdf
I like the regression analysis he did near the end of the paper and applied salesforce results to xero (like you have done)
Great chart is this one - under one scenario that puts XRO at $220 odd in 2017 .... I can live with that
I haven't read that report in a while.
Current market cap is $2B.
Under scenario 1 (whose customer numbers they have already passed), the EV at FY15 should be $3.6B. Add on cash of over $100m to get market cap!
So it will be above scenario 2 which is an EV of $4B and close to 3 so EV should be $5B in less than 6m.
I would love to see an updated report.
It's interesting seeing the current SP only factor in two years of 80% growth rather than the 5+ during the run and peak. If we were to to take it very fearfully (ie a macro correction [a crash has <10% chance imho]) even with a deserved PS ratio of 9 (growth rate/10 + 1) and a 1 year out look the SP would be in the $9-$10 range. So, those calling for $5 or less are wanting to buy a nearly bankrupt company with all the growth gone. This does not even take into account cash in the bank. Whoops, not going to happen!
Fact is, just like stocks which go on runs, Xero has great momentum going for it long term, a great product and a CEO literally willing to die at his desk from overwork. We may have got ahead of ourselves earlier this year (ok we really did!), but this company is not an internet bubble circa 1999. It has real revenues and real margins once the extras are cut. If you don't believe a bubble can survive long term, pull up a 20 year chart of AMZN or YHOO
DYOR :) not holding (yet)
I think the point about valuation is that you have to form a view as to what constitutes intrinsic value.
Clare Capital's report ignores the concept of intrinsic value - and concludes that the market is right and will continue to be always right.
Xero for instance - will always be valued at 40x revenue because one other company they could find has been consistently valued at 8x revenue.
Mark Clare is not a dumb guy - but he knows that some people just like to believe a story... Its probably a marketing angle for his business - Woodward Partners seem to have gone the other way.
I note that Clare Capital includes four recent roles acting for the seller in Mark's bio. When you're selling a business, you don't want the lowball guy or the fencesitter acting for you.
You want the guy that can craft a reasonably believable story as to why you're worth more than all the tulips in Holland.
But it is an impressive looking chart though, and a $28 billion EV looks good and gives those punters who bought in at $40 some hope they might still get a 5 bagger
Note: The paper is bit old now. With revenues FY15 running at about $100m and EV value less than $2 billion the slope on his first regression chart would have to be a lot less anyway
Another interesting week for the XRO share price, but firstly a quick look at what else happened that might have had some influence, or not:
1. The Nas100 - at times XRO has seemed to key off the Naz - which bottomed and this week confirmed a reversal to a new up trend, as it powered through the MA's and resistance trendline.
2. The NZX50 - some stocks soared, particularly the good earners. The reversal to a new up trend also confirmed as the MA's and trendlines were all taken out convincingly.
So what did XRO do?
3. The week opened for XRO on the daily chart by falling through support, followed Tuesday by a nervous plunge to an intraday low at $15 where it bounced. Significantly this is the horizontal support from the lows of June, July and August 2013 - so that's encouraging, XRO may have found a floor of buying support. Conversely, Wed-Fri the price repeatedly backtested resistance at $17 and found strong selling pressure, finishing weakly at $16.29. XRO did not put in any resistance crossovers that might suggest a reversal to an uptrend - except perhaps for very bold traders who bought the bounce. Moreover, indicators are sickly as well - especially money flow is still net out. Less bold traders will be more encouraged to buy when/if XRO breaks up through overhead resistance - at all the points that were recent support - but especially the 61.8% fib and the steep downwards trendline overhead. The MA's are still well above that.
4 .Ditto the XRO weekly chart, which has a sickly pallor about it, encouraged only by finding support at $15, closing the week down on a very long term upwards trendline. Still there is no evidence at all on the weekly chart of a price trend reversal.
I agree. It looks like Intuit is set to take the lion share of the US cloud market while their core businesses particularly desktop products continues to go strong. It seems prudent to bet on them and additionally benefit from a strengthening greenback. If you must have the leverage, it may be safer to try Intuit derivatives or margin trading.
I think it is possible for Xero to sustain its growth for quite a while and justify its current extremely high valuation. Xero has now going for itself what has long worked against it. Accounting firms that decided to go with Xero and certify their staff accordingly will continue to produce customers probably for years to come. Perhaps Xero can use this lag to come up with disruptive moves for the US.
I actually think that because the US is so litigious accountants are much more cautious about recommending software specially new products. Could account for the partner number/customer number at 12 compare to the UK's 25. It may be that using the partner channel marketing method which worked well in the uk,nz and aus may not be so effective in the US.
This makes your point more eloquently http://blog.asmartbear.com/unprofita...ess-model.html
Incredibly litigious. I can almost visualise it now. Customer says new XRO accounting package gave him / her constant headaches as it was considerably more difficult to operate than former software and is now suing for 1 billion dollars because as a result of the stress they now have brain cancer. Sound crazy ? Its a crazy country when it comes to litigation. Just a headline like that would scare off any number of potential professional firms that might have otherwise been potentially interested.
Lighten up Snapper, its the weekend, surely the tongue in cheek was obvious :p
Great post Fisherboy.
So why are we not all buying up DIL? Ah that's right, we like building castles in the sky and playing the "greater fool" game.
WYN is treading water only because of NZs equivalent of Peter Thiel.
SLI is still well down on it highs, along with VML and GEO.
Even the newly listed PAY has received all of about 10 trades since listing.
Are we witnessing the disillusionment with SaaS before even the bigger markets like US and Eurozone, which usually lead, go off it?
What again happened since yesterday morning and now?
Yes we have witnessed an interesting phenomenon of an agricultural nation with less than half the population of NY city and below OECD average R&D spend become the world's golden tech companies laying goose. I'm sure the role various analysts and media played in this will be discussed. Guess didn't help that lousy advice offered by rampers was easy to come by. I'm sure that many of the extremely simplistic predictions were well-intentioned and only fair for you to receive some well-meant advice too: Swap booze for seroquel!
Rod seems to be in love with Vend at the moment if tweets anything to go by
Win some, lose some
http://www.nzherald.co.nz/business/n...ectid=11349518
As Rod says Xero should be proud and take it as a compliment that their high calibre people are poached by a competitor
Ah righto ;)
http://en.m.wikipedia.org/wiki/The_BFG
Yikes, no matter how Rod spins that it isn't good. Not after the US CEO left a few months ago as well...
Totally agree and you don't have to be a lawyer or an accountant to understand why, its just commercial common sense. Fact of the matter is that shareholders should be really concerned if the most senior XRO marketing executives see better opportunities with competitor companies. its not usually just about a better short term pay offer from a competitor as intelligent career minded executives almost always consider which company is best for their career in the long term.
It's OK to keep a close eye on the competition but not to fall in love with them. Rod should be grumpy, long den was not 110% focused on his job.
Quote -
In a release on Sage's website, Longden said he had been following Sage's success for a while before deciding to take up the role.
"As a champion of the software industry, I've followed Sage from afar and like many others, have had my own view of the company. Sage is a fantastic brand and undoubtedly the leading provider of accountancy and book keeping software to small businesses in the UK. Now is a great time to be joining," Longden said.
Took a while for the news to come out
http://uk.sageone.com/2014/10/22/nick-longden/
As the saying goes ... a picture tells a thousand words ... and boy, doesn't this picture say a lot!! And Rod calls him a great guy...huh?
And another thing Winner.... these days it is no longer about being 110% focussed on your job, or the company that is filling your pay packet - it is only ever about one thing...and it aint loyalty.
What has this poor guy done other than a really good job and identifying a legitimate opportunity for himself?
Tech companies in the US avoid this by having no-recruiting pacts.
http://www.bloomberg.com/news/2014-0...ting-pact.html
Since Rod called him a great guy...it could be he went for surveillance at sage just how SAS and CIA does it.
I’m not entirely all that sure KW, it might be true of some execs and senior managers, most others probably do get a share contribution as a part of salary compensation, but if they are anything like the employee share scheme I’ve had in the past, most XRO employees were probably making hay whilst the sun shone and sold them up big time at $40, all that smoko room chatter can lead to alignment in such thinking.
Winner, the market seems to be going along with 'scenario 3' on page 4 as far as the number of users go, and the resulting share price.
So maybe we're around fair value at the moment.
One major cause of sales people moving on from a tech company is the inability of the company to deliver what the client wants when promised by the sales person. I'm not saying this is the case with XRO, but I've come across this before
I don't think the wheels are falling off xero just because an executive gets offered double/triple/quadruple the money by xero's competitor in the UK. Only newsworthy because of xero's rollercoaster sp. Relatively big turnover for shares in the last week (just as many buyers as sellers lol). More interesting sage one has tripled customer numbers to 33000. Fear does seem to be ruling the roost but if customer numbers go over 1 million by March 2016 plus more capital raising greed should be back on the table but certainly won't happen for a while. I think sp will settle somewhere for a while (maybe seeing the emergence of that number because of that liquidity) until a longer discernible trend comes from the US or another indication of more capital by thiel or xero reaches a million or Nasdaq listing. Still can't see too many people raving about sage one or MYOB essentials or whatever they are calling it this week but it's hard to Argue that QBO hasn't copied xero's sales pitch vizav cloud accounting but undercut them. QBO has also brought out a new practice management suite and doing the cloud road shows. Also noticed allot of unhappy xero CPA's about H&R tie up who CPA view as commodification of accounting.
http://home.nzcity.co.nz/news/article.aspx?id=196223
Cloud-based accounting software company Xero, whose shares have tumbled 49 per cent over the past six months, was unchanged at $16.15, and is expected to exit the MSCI index, Mr Goodson said
Interestingly salesforce with 130mil in turnover and 80% growth was valued at 2 billion (2005)but I think Clare's forward projection for 2017 is ridiculous I like the real world projection given by salesforce stats much better because it is not one single clever guy extrapolating but a real market with all the attendant share brokers/retail investors/instos/analysts saying their piece and putting their money where their mouths are in a real market.
Point taken FB. I should have said that the market is currently going along with scenario 3. What fair value is, is another thing altogether. I liked the way the article came up with scenarios, but they didn't give any details at all on the assumptions made in coming up with those scenarios.
Both Rod and the Woodward guy who says Sell are right
http://www.gmi.co.nz/news/1591/war-o...n=war-of-words
War of words in Wellington
Nathan Field
The Dominion Post, 28 October 2014
Nathan Field, Portfolio Manager, Global Equities at Gareth Morgan Investments
There is nothing a CEO hates more than a niggling equity analyst. While CEOs are busy building empires and creating jobs and changing the world, analysts sit behind their desks with their beady eyes and trillion-row spreadsheets, picking holes in a company’s business model.
CEOs are infinitely more important than equity analysts, but through some perverse quirk of nature, even the lowliest analyst is ‘unsquashable’, like a pesky fly buzzing in management’s ear.
Witness the mini-stoush between Xero CEO, Rod Drury, and Woodward Partners analyst, Nick Lewis.
Late in 2013, Wellington-based Lewis downgraded his recommendation on Xero from Buy to Reduce, citing increasing risks as the Kiwi upstart took on US accounting software giant, Intuit. He argued that Xero might struggle to bankroll a protracted US marketing campaign against such a formidable competitor.
The downgrade failed to put a dent in Xero’s share price, which had recently been boosted by a high profile NZ$180m capital raising. Heavyweight investors from the US were right behind the company, and the shares continued to rise to a peak of $45 in March 2014. Message boards concluded that Lewis didn’t know what he was talking about.
But Lewis stuck to his guns. In April this year, he said there was no evidence Xero had gained any traction in the US, and unless market share improved significantly, the share price would struggle to hold at $20. At that stage, Xero shares were trading at $37.
Drury responded with typical CEO bullishness, arguing that it was too early to judge success in the US, and that all indications were positive.
But investors started to get nervous. It didn’t help that high-flying US technology companies were selling off, raising questions about Xero’s lofty valuation.
By the time Lewis downgraded Xero to Sell in July, the shares had fallen below $26.
The negative sentiment intensified in September, when it was announced that Xero’s US boss, Peter Karpass, was stepping down after only seven months in the job. A month later, Xero’s half year results revealed a less-than-stellar 4000 North American customers had been added in the six months to September.
Lewis rubbed salt in the wounds by saying Xero’s board should reconsider its commitment to the US. Drury called the idea ludicrous, and even suggested that Lewis was being un-Wellingtonian.
At the time of writing, Xero’s shares are trading at $15.50, some 66% off their peak. So is the analyst right and the CEO wrong?
In fact, they are both right. They’re just speaking to different audiences, with vastly different risk appetites and time horizons.
Woodward Partners is a small, NZ-based institutional stockbroker. Its clients are NZ fund managers raised on a market dominated by stodgy monopolies, electricity companies, and whatever Telecom is calling itself now. They do not typically invest in technology stocks with negative cash flows and eye-watering valuations, no matter how blue the blue sky.
It’s the analyst’s job to be realistic, not relentlessly optimistic. So while Lewis’s downgrades and criticisms might seem harsh, he’s talking directly to his clients, who are likely more obsessed with downside risks than upside potential.
Drury, on the other hand, is the CEO of New Zealand’s most exciting company in years. He has a core of wealthy shareholders who hope to make multiples on their original investment, not modestly beat the NZSE 40.
To these growth-hungry investors, the idea of pulling out of the US is indeed crazy. Xero has a fantastic product, and its success in Australia and the UK has certainly earned it the right to give the US the old college try. It's not surprising that Drury reacted somewhat frostily to the research of naysayers like Lewis. It’s insulting to an ambitious company that it might have bitten off more than it can chew, or that it would be better off consolidating its position in established markets.
Provided Drury has the support of his wealthy investors, he has a mandate to pursue his dreams of world domination. But the moment that relationship changes, and the speculative cash dries up, the buzzing of a niggling analyst is likely to get a whole lot louder.
This article reflects the personal views of the author at the date shown above. The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed, or relied on, as a recommendation to invest in a particular financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any investment decisions.
Read the bloody report, even though it is a short one and no doubt Mark has a lot of background stuff he didn't include in it.
Mark does talk about addressable market and no doubt implied market share was a reality check for his scenarios. After discussing the historical growth rates he 'built a number of growth scenarios for Xero based on customer numbers. We see a worst case FY2017 customer number of 750,000 and best case 3 million.' Back to his addressable market comment the best case is just under 10% market share (seems a reasonable scenario to model)
The lines on the graph represent those scenarios. Simple. Growth rates are shown in the table - they range from 48% pa for worst case to 109% pa for best case.
For his DCF of each scenario he states his assumed EBITDA margins and makes mention of a range of terminal growth rates. WACC used 11.1%. A table summarises the outputs and the valuations from $5.60 to $30.91 (number of shares higher now because of the cap raising)
Did we read different reports Goldstein? I would say they are more than just lines on a chart, seem to rationally calculated to me
How would you value Xero?
Must be time for the quarterly cashflow report today?
31/10/2014 last year and 31/07/2014 was the last one...
:D:D:D:D:D:D:D:D:D:D:D:D:D:D:D:D:D:D:D:D