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Xero falls to 10-month low

Xero [NZX: XRO] shares were down 6.05% in late trading to $20.20 — a 10-month low.

Across the Tasman, Macquarie initiated coverage with an "under-perform" rating, picking up the familiar analyst theme that Xero is a strong, growing operation whose valuation is running head of the pace (or "beautiful company, expensive stock" as Macquarie's note is sub-titled).

“We expect Xero to gain significant market share of the small business accounting software market. They have a compelling product and have gained a good market share in the countries they entered first. However, the current share price is factoring in too much upside,” Macquarie analyst Daniel Frost says in an AFR article called "Share sag puts shadow over Xero’s global foray."

The article also references another common analyst theme: Xero's challenge in the key US market, where it faces incumbent Intuit.

Aside from the negative press across the Tasman, there has been no major Xero news, and today's fall has been on thin volume.

Asked by NBR for comment on today's share price movement, CEO Rod Drury preferred to look forward, saying, "As we covered in our Annual Meeting Xero crossing $100 million in annualised revenue at an 80% growth rate. That puts us with the top SaaS [software as a service] players in the world and the business is going very well.

"Looking forward to showing some of innovations we've been working on at #Xerocon Australia next week. At over 1300 registrations we believe we've become Australia's largest tech vendor conference and New Zealanders should be very proud of that."

What do you think? Has Xero's recent fall created a buying opportunity? Click here to vote in our subscriber-only business pulse poll.

Comments and questions

Maybe MYOB is gaining back ground on Xero after buying Payglobal??

I sold at circa $7 very happy. Back then MCAP was prob 20 times sales, profit negative and overheads ramping and likely to accelerate.

In the end, what profit and reasonable PE multiple do people expect?

I decided $100m in profit would be unlikely within 7 or so years. And US growth a real challenge that may require discounting and v high ad spend.

So what's fair value now? I'm an amateur but I'm not sure I'd buy back in at more than I left off.

Looks like Rod is desperately trying to talk up the share price. There is not a lot of liquidity in the stock. All the equity professionals think it is overvalued apart from Gaynor. The share price looks like it will go under $20 next week, probably trend downwards to $15. Take a good profit while you can zero shareholders!