Questions are emerging about the heady success of cloud
accounting company Xero as further huge expansion costs come
at the expense of profitability.
While Xero's share price outperformed all comers on the stock
exchange last year and it maintains a $210 million war chest,
with eight consecutive losses behind, the massive expansion
costs are causing concern.
Analysts do not see Xero booking a profit for at least two to
three years, prompting several questions about where its
value lies for shareholders, its capital requirements and its
Craigs Investment Partners has a consensus price target at
$30 and maintain a ''hold'' recommendation, while broker
Forsyth Barr has the 12-month target unchanged at $24.75 and
the stock rated, unchanged, at ''underperform''.
Craigs Investment Partners broker Peter McIntyre said Xero
had had a ''lofty appreciation'' in value. Its shares were up
259% from $12.80 a year ago to its recent 45.99 high, but its
future was ''finely balanced''. Its market capitalisation was
more than $4 billion.
''Growth is already factored into the share price but Xero
needs to get revenues adjusted upward,'' Mr McIntyre said.
''The question is whether $210 million [current cash in hand]
is enough to keep ahead of the curve of competitors, then
give a boost to its operating cash flows ... where investors
could then take heart that growth can continue,'' he said.
Forsyth Barr broker Haley Van Leeuwen said Xero's booking of
a $35 million loss this week was as expected, noting customer
growth was beyond 80%, revenue was up and strong growth was
expected in Australia.
However, she believed Xero was a ''risky investment
''There's no doubt that Xero has performed very well to date
and has a great future.
''However, in our view, investors are not being adequately
rewarded for the risks they are taking on,'' she said.
Mr McIntyre believed investors would not see a profit booked
''for the foreseeable future; two to three years at least'',
noting management would be reinvesting back into the
company's growth and expansion.
''The tech stocks can have the hype, show new customers and
sales up, but the fundamentals eventually come back to
revenue and profit, then the company providing income to
investors,'' he said.
Ms Van Leeuwen said: ''As Xero needs to grow in the United
States to meet its aspirations its costs will continue to
outstrip revenues for several years yet.''
Mr McIntyre noted the US accounting sector was ''fragmented''
and Xero faced increasing competition, such as
Australian-listed MYOB, which now better understood Xero and
its targets and was ''making moves into its space''.
On the question of whether the $210 million war chest was
enough to fuel growth, Mr McIntyre said it was possible Xero
''may at some time have to consider'' going back to the
market for more capital.
''But they have got some big global players on the share
register. They would be supportive of further capital
raising, if requested,'' Mr McIntyre said of US institutional
Blackrock, City Corp and Credit Suisse.