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Shares of Xero drop below $20 mark as investors doubt US growth

Friday 10th October 2014

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Shares of Xero traded below $20 for the first time in a year, as investors grew cautious over the pace of the cloud-based accounting software firm's expansion in the US market.

The Wellington-based company's shares fell 8.4 percent to $19.20 in afternoon trading, and have declined 57 percent from their March peak of $45.99 in part due to a global selloff as investors questioned high valuations relative to earnings of tech companies. The stock is rated an average 'sell' based on the consensus of five analysts surveyed by Reuters, with a median price target of $20.50.

Xero wants a million customers, and is targeting growth in the US market where it sees the potential to take market share of an estimated 29 million small to medium sized business owners. On Wednesday, 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."

The company faces aggressive competition from incumbent Intuit, which runs QuickBooks. In July, chief executive Rod Drury told shareholders at the annual general meeting in Wellington that everything Intuit did was now in response to Xero, and conversion of its 5 million desktop customers to the cloud wouldn't work. However some analysts have questioned whether the company has just shown its competitor what it needs to do to keep market share.

"People are suggesting that the rate of growth in the US is at a level which is probably less than they thought it would be and they're certainly aware that Intuit is growing very quickly in that competitive marketplace," said Rickey Ward, NZ equity manager for JB Were, which doesn't hold the stock. "They're not saying that Xero doesn't have a viable product that works. At $40 you were suggesting the company would be able to gain 25 percent to 30 percent market share in the US. There is nothing to say that they won't do that, but you've just got to be conscious based on the current information you are paying for that success today."

The company's US ambitions came under further scrutiny last month, when former PayPal executive Peter Karpas, Xero's North America chief executive, left the company just six months after joining. At the time Xero's chief executive Rod Drury told BusinessDesk the company and Karpas agreed the business was at a different stage compared to his skills. The company hasn't replaced him, but announced Andy Lark, former Commonwealth Bank of Australia executive, to be its new chief marketing officer as it moves to strengthen its push into the vital US market.

Also weighing on the stock may be that staff were emerging out of a blackout period, Ward said, meaning they were able to trade shares which would boost liquidity. The market was also aware that the company's escrow period after it raised $180 million in capital last October was coming to a close.


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