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Xero shares drop below last year's $18.15 share issue price as escrow ends

Monday 13th October 2014

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Shares of Xero have fallen below $18.15, the price that the cloud-based accounting software firm last year sold its stock at as part of a $180 million capital raising, as those investors come off share trading restrictions.

On Oct. 16 last year, the Wellington-based company issued 9.92 million shares at $18.15 apiece, to Matrix Capital Management, Peter Thiel-backed Valar Ventures and other US investors, as part of a capital raising to fund its growth plans in the US market. The escrow period which prevents investors in the capital raising from selling their shares, ends this week.

Shares of Xero fell as low as $17.75, and recently traded at $18.05, giving the company a market capitalisation of $2.3 billion, below the $5.9 billion it recorded in March when the stock soared to $45.99. The stock has fallen some 57 percent from its March highs, as a shift in global sentiment has seen investors re-evaluate valuations of tech-based, momentum stocks, like Xero.

"The market isn't dumb and knows the new amount of stock is essentially freed up for sale," said James Smalley, director at Hamilton Hindin Greene. "Particularly if it is a low liquidity stock, that can't help but have an effect on the short-term shareprice. Obviously the long-term share price is driven by the performance of the business, but in the short-term senitment and simple demand and supply is what moves share prices."

Xero wants a million customers, and is targeting growth in the US market where it sees the potential to take market share of an estimate 29 million small to medium sized business owners. Last week, Xero said that just 22,000 of its total 371,000 customers are based in the US. It said the transition to cloud-based services "will play out over several years", with most American accounting firms focusing on compliance and are "only at the beginning of the transition to the cloud and proactive advisory services."

"No one is really questioning their dominance of the Australasian market, and to a certain degree the UK," Smalley said. "The size of the multiple they were trading on and the market capitalisation they had was implying almost a seamless way to move from New Zealand to Australia and to the UK, that they were going to get that sort of take up in the States at the same speed."

Further weighing on the stock, Smalley said, was a shift in offshore sentiment, as investors fret over a possible stall in global economic growth, particularly in Europe where weaker German data is causing concern the continent may slip back into recession. Growing geo-political tensions in Ukraine, Syria, Iraq and Hong Kong as well as the threat of Ebola has added to uncertainty in the market. The NZX 50 Index fell 1 percent in morning trade to 5173.413, to its lowest since late August.


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