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Fairfax NZ News writes: Strong demand from overseas investors is driving Xero's share price to new highs, brokers say. The cloud accounting software company has climbed further on the NZX, rising this morning to fourth most valuable company on the exchange - worth more than Contact Energy - after its shares consolidated above $30. Later this afternoon the stock became third biggest, with a market capitalisation of $4.3 billion, surpassing Telecom.
Shares in the cloud software firm gained 2 per cent yesterday and were trading above the $30 mark this morning. Xero's share price traded at an all-time high of $33.89 this afternoon before slipping to $33.60, up 11. 5 per cent.
The only companies with a higher value are now Auckland International Airport ($4.6b) and Fletcher Building ($6.7b).
Craigs Investment Partners head dealer Bryon Burke said the rocketing share price was coming from overseas demand and short supply of shares.
"It's certainly been priced on demand versus supply."
It was not clear whether the buying was coming from Asia or Australia, he said.
It was hard for New Zealanders to understand why the share price of a company that did not make any money was continuing to climb, Burke said.
"How do you value it?"
Xero said last month it expected to generate revenue of $30.3m for the six months to September 30, although profits are yet to eventuate as the company focuses on growth.
On October 31 it said its net cash outflow for the September quarter was $13.1m, but after raising money from a share issue priced at $18.15 a share it had a cash balance of $230m.
Burke said overseas investors were not as worried about traditional methods of valuing a company, he said.
Tyndall Investment Management domestic equities manager Ricky Ward said the continued ascent of Xero's stock would probably be a surprise to most people.
"I think people struggle to understand how you value a company like Xero."
If investors tried to apply more traditional valuing techniques to the company they would tie themselves in knots, Ward, said.
"It's very hard to say whether it warrants being a $50 stock or a $1 stock."
In the past a lot of companies caught up in tech bubbles did not succeed, he said.
However, Xero had sufficient capital to get through any challenging times and the company was still growing.
Ward said personally, he thought the company's share price had got a "little bit ahead of itself".
However, while there were overseas investors buying a few thousand shares a day with limited supply the stock would remain at a high price, he said.
The company would really have to disappoint to scare off its overseas investors, Ward said, adding that unless that happened there was no reason for Xero's share price to come down.
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Xero now worth more than Telecom
NBR Staff writes: Xero shares [NZX: XRO] rose 11.18% in midday trading to hit a new high of $33.50 - sending the cloud accounting software company past a new market cap milestone of $4.27 billion - edging it ahead of Telecom as NZ's largest listed technology company.
Telecom [NZX:TEL], which was down 0.85% on the session for a market cap of $4.24 billion (a valuation underpinned by $4.2 billion revenue and $236 million net profit iin its 2013 financial year).
There was no major news for the company today. But it would not have hurt that Mr Drury posed with Intuit CEO Brad Smith at a trade show in Las Vegas during a social chat. Analysts tell NBR the US market is the key to Xero justifying its heady stock price - and Intuit, which holds a near-monopoly in personal and small business accounting with its Quicken and QuickBooks products, is the company standing in its way. The question is whether Intuit will rollover, push back hard, or buy Xero.
Loss-making Xero, which says its monthly subscriptions imply annual revenue of $70 million has been on a tear since October 14 when it announced it has issued new shares to raise $180 million in new capital - most of it from re-upping US investors.
The latest rise means Mr Drury's 18.47% stake in Xero is now worth $789 million.
Forsyth Barr (the only major brokerage covering the stock) upped its rating from "reduce" to "hold" with the mid-October capital raising,and increased its 12-month target price by 39% to $20.30.
Analyst Andrew Harvey-Green says evidence points to Xero being successful in the US, but the jury is still out on whether it will successful enough to justify its heady valuation. ForBarr describes the stock as speculative.
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Fifth straight day of monster gains for Xero
UPDATE / Oct 18: Xero has surged for a fifth straight day. In midday trading, its shares were up 7.94% to $27.20 for a new market cap high of $3.47 billion.
The online accounting software's latest climb came as CEO Rod Drury was named EY 2013 NZ Entrepreneur of the Year.
A week ago, shares were at $17.94. The stock, which listed at $1 in 2007, and sunk to 68 cents in 2008, is now up 409% over the past 12 months.
The $180 million capital raising announced Monday diluted Mr Drury's stake in Xero from 18.47% to 17.03%.
However, he is still the largest single shareholder, and his stock is now worth around $578 million.
See Mr Drury's comments on his company's rocketing valuation here.
Growth stock Xero (which expects to make a loss this year on annualised revenue running at a rate of $70 million) has left many traditional stocks in its wake as its quadrupled in value over the past year. They include Chorus (just under $1 billion), Sky City ($2.3 billion), Sky TV ($2.4 billion) and Mighty River Power (just over $3 billion).
Xero is now closing in on NZ's largest tech stock, Telecom, whose $4.1 billion market cap is underpinned by $4.2 billion revenue and $236 million net profit iin its 2013 financial year.
The online accounting software company recently reported 213,000 paying customers. It's shooting for at least 1 million. A key part of its strategy is taking on the incumbent Intuit in the US market.
Comments and questions
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The valuation is based on Net Present Value of the future cashflows, and thus factors in the likelihood that they will get 1,000,000 customers.
Just going to take the opportunity to anonymously gloat that I bought in at 79c. A 32 bagger!. Except that it is not in the bag as I can't bring myself to sell.
I suspect a lot of the shareholders are like me. It doesn't matter what the current price is - I don't want to sell as I enjoy being a part of it and am a believer in the potential for Xero being a global leader in a huge market.
I also suspect that most shareholders are also business owners and accountants. We use the product and understand how good it is compared with the incumbents. As business owners we also appreciate the excellent execution to date and the challenges they have overcome.
I also feel very well informed with my investment given the complete openness of the numbers and diatribes of management's inner thoughts on social media. It is an open book with no surprises and I don't know of any other company like it.
How the worm turns