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Xero shares drop 14% to four-month low, leading growth-stocks lower

Xero [NZX: XRO] shares slumped to a four-month low, leading New Zealand stocks lower as investors joined a global sell-off on concern high-growth companies may struggle to turn sales growth into profits.

Xero fell as low as $29.50, the lowest since Dec. 5, and were recently down 13 percent at $31. The stock has soared since the Wellington-based company raised $180 million in October, selling 9.92 million shares at $18.15 apiece. Xero is rated a 'sell' by two analysts and a 'buy' by a third, with a median price target of $36, according to Reuters data.

The cloud-based accounting software company has identified North America as a key focus for growth putting the cloud-based accounting software company up against dominant incumbent Intuit, which has a market capitalisation of US$21.2 billion to Xero's $3.95 billion. Xero's North American customer numbers tripled to 18,000 in the year ended March 31, still only 6.3 percent of its total customer base.

"The market is beginning to realise Intuit is going to be a very, very difficult competitor to roll," said Matt Goodson, executive director at Salt Funds Management, which doesn't hold Xero shares. "The question then becomes how much cash has burned in trying to assert a strong position in the US and is there much of a wait until they cross over to positive cash flow - a couple of years, or many years?"

Xero more than doubled its annual loss to $35 million in the 12 months ended March 31, while boosting revenue 84 percent to $70.1 million.

The company's paying customer numbers 84 percent to 284,000 in the year, making it more than a quarter of the way to its 1 million customer target. Australia is its biggest market, with 109,000 customers as at March 31, compared to 59,000 a year earlier, ahead of New Zealand with 102,000. British clients more than doubled to 47,000.

Salt Funds' Goodson said investors will place more scrutiny on the performance of Xero's subscription numbers and revenue, and watching whether it is making inroads into the US.

"It's coming up to delivery time and I suspect their share price will react quickly and strongly" either way, he said.

Xero wasn't the only growth stock to be sold off today, with bladder cancer test developer Pacific Edge declining 3.9 percent to $1.24, governance app maker Diligent Board Member Services down 3.5 percent to $4.15 and A2 Milk Co falling 2.4 percent to 83 cents.

Outside the benchmark NZX 50 Index, intelligence software maker Wynyard Group sank 9.4 percent to $2.40 and search engine developer SLI Systems dropped 6.4 percent to $1.90.

Stocks on Wall Street dropped in New York trading, with the tech-heavy Nasdaq Composite Index down 0.9 percent and the Standard & Poor's 500 index falling 1.1 percent.

Salt Funds' Goodson said growth stocks had "an enormous run in 2013" and are beginning to give up some of those gains this year.

"What's happening to these stocks in the US, is there's a mix of hope and reality - clearly hope had won the battle in the preceding few months" and investors are questioning when and if any free cash flow is going to come from high-growth companies, he said.

(BusinessDesk)

Comments and questions
6

I'm guessing Mildford's active growth fund is going to look a bit sick in the coming months. Serves them right for investing in companies at stupid multiples. The managers should spend more time trying to get privately owned nz software companies listed at 3x to 5x revenues than investing in anything above 5x.

Milford bought $16 million worth of shares in Xero's $180 million rights issue in October last year.

The capital raising involved 9.92 million new Xero shares issued at $18.15 apiece (the market price at the time) - so Milford is still well ahead, if not so much as a week ago.

Somehow, Anon, I think you're the type of guy (or girl) that Warren Buffet simply adores. Why? Because you have made him very, very, very rich.

Milford have invested in our company (nz owned technology company) , and have invested in several others with the aim of growing NZ listed tech sector, so might be worth checking the facts before giving them a hard time. They are taking their fair share of risks with smaller NZ companies for the right reasons.

Broader picture - not sufficient attractive assets available for NZ fund managers to invest in

Too many NZ companies give up and sell out early to offshore entities

I see comments about Milford investing in NZ Tech companies, and yes they do. But make no mistake Milford are doing so to make a return for their investors and Kiwisaver fund holders. If Xero shares go from $18 a share (when they bought 1 million shares) to >$40 they may decide to re-balance their holding. I mean they only had to sell 420,000 and they have got all their money back and still hold 580,000 shares. That to me would show a smart investor, 1/2 million free shares and if Xero goes up brilliant, if it goes down to $12 a share they still get $6M.

Just recently 2.7 million shares were exchanged for $117.3M and the share price hardly moved, yesterday a few hundred thousand shares are sold at price dropped 13% to near $30. Not a good sign, imagine if someone wanted to sell half a million shares.