Is it time to sell Xero as growth trumps profits? / Is it time to sell Xero as cloud rivals rev up?

Rose Powell for The Australian Financial Review & Sydney Morning Herald writes: Cloud-based accounting software company Xero has announced further growth in its Australian paying customer base as it seeks to address concerns that it has been over-valued by investors keen to buy into the potential of cloud computing.

The newly released data showed Xero’s Australian user base grew from 109,000 accounts in March this year to 147,000. The figures show Australians make up just under half of Xero’s total user base of the more than 300,000 worldwide.

News of customer growth will please investors, who have largely bought into growth story from founder and chief executive Rod Drury, despite continuing losses and no sign of a profit tipped for at least a further 18 months.

Mr Drury said his team was focused on a “land grab” growth strategy, particularly in the United States and the United Kingdom.

Xero has raised over $NZ250 million in growth capital, some from early angel investors but the majority from listing. The startup has so far delighted investors with a 425 per cent stock increase in 2013, peaking at $43 on the ASX early in 2014, earning them the “Apple of accounting” moniker from investment bank Credit Suisse.

It is still well above its initial offer price, but on Friday, the stock was trading at around $21.30.

The company has touted plans to list in the United States as early as next year, and Mr Drury said keeping investors happy would be a priority in the pre-profit years. This means taking on criticism of those cynical about the long term value of the stock

“The fun bit of doing this as a public company is that everyone, literally everyone, has an opinion,” Mr Drury said. “But I don’t really care what other people think. We just get on and do our own thing. It’s worked so far.”

TIME TO SELL

Select Equities analyst Mark Southwell-Keely has a blunt assessment that Xero’s stock is significantly overvalued, and said the executive team should sell the company now.

“Even half of what the stock is priced at now is way more than it’s worth,” Mr Southwell-Keely said.

Mr Southwell-Keely said Xero was growing well but that new cloud-based products from competitors such as MYOB, Reckon and Intuit would drastically alter the market.

“The market is pricing Xero essentially on the basis of a hypothetical of addressable market, but the market will change so much even in two years I’d say there is little to no chance of those predictions being accurate,” Mr Southwell-Keely said.

Mr Drury said he had no plans to exit and was building the business for the long haul, with confidence in their current strategy.

“We know what we’re doing, we’ve shown that so far. We’re in fantastic shape and only at the beginning of the journey,” he said.

An obsession with growth has been a feature of Mr Drury’s entrepreneurial career, which included shutting down two earlier companies that were not growing fast enough.

The first was a document management software startup he closed in 2002. The second was an initiative to lay an internet cable directly linking Australia, New Zealand and the United States.

He had success selling email service Aftermail to Quest for $US45 million in 2006.

Xero’s new user data was announced at the company’s annual convention in New Zealand on Friday morning. Australian managing director Chris Ridd also announced partnerships with Telstra, insurer CGU and the Australian Taxation Office at the conference.