Okay I'll have a stab:
Addressable market
Clare's position:
Xero’s internal take (and checked by us) on their
addressable market (New Zealand, Australia,
United Kingdom and United States only) is
approximately 33 million customers. That means
two things:
Casino's take:
US
The house agrees with Woodward. The addressable market is wildly overestimated and pushing reality. The often quoted 29 million SMBs in the US include
around 20 million contractors, freelancers, sole traders, etc. The addressable market is probably ~10-12 million. 4-5 million are Quickbooks customers (not counting the ones using a pirated copy of Quickbooks...). 700000 are on QBO. 300 000 on Wave. Zoho books, Kashoo and Freshbooks are also in the game. Coming tax season Intuit will start adding 100 000 new QBO customers per quarter.
The question is not how big is the cake but who will get the crumbs. Unlike Woodward I believe it's silly to pack up in the US without giving this and next US tax season a fair go. They have the money to do so and are competitively placed in the race for the 1-2 million SMBs that will not go with QBO.
UK
It's a bigger market than Australia and Xero is doing really well. But Sage is a much stronger competitor and it's later in the game. The UK could certainly compensate for slowing growth in Australia. Hard to put a number on it because the adoption rate seems low. I see potential for 3 million cloud customers of which 1 million will default to Sage. The three companies (Sage, Xero, Intuit) will be fighting over the remaining 2 million.
Oz
Very interesting to watch. Smaller market than UK but high adoption rates (probably due to Xero's great work) and the incumbents MYOB/Reckon looking shaky. Bain will have to invest if they want to compete and I'm not sure if they are willing to do that. I think we will see 1-2 million SMBs in the cloud and they are genuinely up for grabs.
NZ
300k.
The way I see it, the addressable market is only 4-6 million.
Competitors
Clare's position:
While SaaS may be the future of their businesses,
the Clayton Christensen disruptive innovation framework suggests it will be hard to reconfigure their
businesses even if they recognise it. If Xero’s competitors recognise the future is SaaS – their best response is
probably to acquire Xero; while leaving the business independent and allow it to potentially cannibalise their
historic businesses.
Casino's take:
Intuit has SaaS in their DNA. They invented cloud accounting in 2001 long before Xero. They
are disrupting themselves. Their accounting and practice management software is brand new and best in class. Intuit has shown a huge hunger for acquisition but all were directed at destroying Xero. MYOB has too much debt and Bain is looking for an exit. Sage offered 1.2B for MYOB probably not realising in how much trouble they are. Such sums are below today's mcap.
Salesforce
Clare:
Salesforce.com, the most “established” listed SaaS company, is still chasing market share. Impatient for
growth – patient for profit. If players like Salesforce.com are still prioritising growth – that may mean that
Xero is going to be doing something similar for quite some time still.
Casino
Xero is not the most established listed SaaS company. It will do well but there are limits to how big it can grow. Sorry.
Bottom line
Clare:
If Xero is not able to continue to grow at the rates it has achieved historically, and that we are forecasting, then we would expect there will be a material downward revaluation of the company. New Zealand investors
in that situation would likely start to see the company make profits – but then be complaining about the share
price drop. We are not expecting the growth to stop – but it is the biggest risk facing the company.
Casino:
Growth continues to be strong and today's share price is exactly where it was when Clare published their report. Due to strong competition, it will become more difficult and costly to maintain current growth rates. All up, a 15x forward revenue multiple is generous but justifiable. Great product, great company, great success story, more great things to come but that's already priced in.