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Deutsche Bank rates Xero a 'sell' with target price of $18.90/share

Shares of Xero [NZX: XRO], the cloud-based accounting software firm, are overvalued on US growth prospects and have been rated a 'sell' by Deutsche Bank as it initiates coverage of the company.

The investment bank, which part owns Craigs Investment Partners in New Zealand, gave the Wellington-based company a target share price of $18.90. Shares of Xero recently traded at $23.25, well below its March record of $45.99. It last traded below $20 in October last year.

Globally tech stocks have pared gains made early in the year and the NZX Sci-tech Index, which includes Xero, bio-tech company Pacific Edge, BLIS Technologies and Windflow Technology, has fallen some 28 percent since January as investors questioned high valuations relative to earnings.

In a note "Too much blue sky baked in" analysts Stephen Ridgewell and Joshua Dale say the "market is pricing in a faster ramp up in US sales than is likely and that the share price is likely to de-rate" to $18.90 on a discounted cash flow basis. The company needs two to three more years to build its growth engine in the US, they said.

The Wellington-based company wants a million customers, and is targeting growth in the US where it sees the potential to take market share of an estimate 29 million small to medium sized business owners. According to chief executive Rod Drury's annual general meeting presentation in July, the company has 334,000 customers worldwide, two-thirds of which were in Australia and New Zealand, and 18,000 in North America.

Banking fragmentation and the complex tax and state system in the US was a technical hurdle the company had to surmount, but more importantly competition from incumbent Intuit meant Xero would take several years to build momentum, the analysts said. Xero needed to build a product suite which matched Intuit's own offerings, incorporating tax management as well as catering for the prevalence of cheques in the market.

Xero was on track to take market share in Australia and New Zealand over the next two to three years, and was gaining ground in the UK but needed banks to allow for direct data access, Ridgewell and Dale.

The stock is rated an average of 'hold', based on five analysts as surveyed by Reuters, with a median price target of $21.75.

(BusinessDesk)

Comments and questions
14

What did the NZ institutional investors pay when Xero entered the NZX50? Mid to high 30's?
Oops.

Read: "Speculators and traders, including ourselves, ramped the holy beejezus out of this stock, cashed up some, are looking to short the rest and buy in near a bottom when fundamentals are more in the realm of Earth and not Jupiter"

The psychology at play in the market is always fun to watch :)

Chickens, roosting?

The emperor has no clothes?

Magically, analysts manage to set their target price after prices already have bolted.

Suspect as performance continues to be what it is , and its share price continues to drag, analysts will duly move TP's down.

I might buy some at $23, xerocon's are starting up and they always go up a few dollars then

XERO'con' is exactly that. It's great to see a resurgent MYOB and Intuit delivering great products to SME's but not with the hype and PR bs that Xero promotes.

Tall poppy scything going well today!!

The shareprice drops 50% and they finally put a sell rating on it. Bit late I would think. It they had picked it at $40, or $30, it would have been good but far to late for their clients to make use of it.

From the current shareprice, I back Xero over them.

Maybe this a reflection of the fact that the business model doesnt stack - afterall you cant sell a cheap monthly software service for $50 when it costs you $150.00 to deliver and support it! - growth in the USA is a red herring, the company has a great name for an investor! as what you put in will disappear, get out now people to at least save your shirt

You would make a lot more by doing the exact opposite of Deutsche bank recommendations, so buy now, then sell later when they upgrade it to a buy.

Absolutely, the sell would have been a good rec at >$40 but of course they were silent. A good call now might be neutral or hold, but "buy" I think not. Until we get a real test of the capital raising at $18 the only thing we are sure of is that dead cats bounce.

A good idea to talk it down and then buy some!!

It's a no brainer. Just need to be patient. Think about it. How many new bussiness are created every day in the US. Most will try cloud accounting solutions at some point. Affordable and reasonably solid product as Xero is getting a selling engine in the USA. Even with a handful of competitors there is lots lots of growth potential! Xero will grow, no question about it, only a matter of time. Future of accounting is cloud segmented , multiplayer software. If they list in the USA the exposure will be monumental and who is making the best marketing in the bussiness.... Xero!