We produced a Thought Piece on our take on Xero’s valuation at the beginning of October 2013, before the US$150 million capital raise and when the share price was trading at $19.00. Three months later the share price is now at $42.00.
The Executive Summary of the Thought Piece is highlighted in the bullet points below:
- Xero is a high-growth technology company and not a Ponzi scheme.
- Losses are fine as long as value is being created.
- However – from a fundamental valuation perspective Xero is a challenge. First – there are a wide range of future potential growth scenarios. Second – we don’t know when Xero will move to being cash flow positive. From patient for profit and impatient for growth – to the reverse.
- Salesforce.com shows that the pursuit of growth for SaaS companies can go for a long time.
- While we have done fundamental analysis – this is like some economic models; interesting but potentially not grounded in reality.
- However – the market is valuing growth for both Salesforce.com and Xero and we can illustrate those relationships.
- Based on those relationships and our analysis of future Xero growth scenarios – the Xero value story may yet have a distance to go.
- At the most basic level, in the near-term, Xero is all about the customer growth numbers.
The full PDF can be found here… Clare Capital’s Thoughts on Xero.