By Bernard Hickey
It's been a while since we've had this much excitement around a company on our stock market.
People on the street were talking about it, or more accurately, tweeting about it.
Around 1 pm on Thursday shares in Xero hit NZ$41 on the NZX, valuing the accounting software firm at NZ$5.3 billion.
This pushed it above Auckland Airport and Telecom to make it New Zealand's second most valuable listed company behind Fletcher Building.
This is astonishing on so many levels.
Fletcher Building, which is worth around NZ$6.5 billion, has 18,830 workers, annual revenues of around NZ$8.5 billion and is on track to produce earnings before interest and tax this financial year of up to NZ$650 million.
Meanwhile, Xero had revenues of just NZ$28.7 million in the six months to September 30, albeit they almost doubled in the last year. Xero had just 507 staff as at August 1, although that number is rising almost daily as it ramps up.
It has never made a profit.
It's an old joke now that Xero is its name and its profit line. How on earth, or even in this universe, can a company with so little track record be worth so much?
The answer is all about Xero's potential to become, as CEO Rod Drury described it this week, the "Facebook of Business."
International investment bank Credit Suisse this week even called Xero the "Apple of Accounting."
These are extraordinary aspirations, but Xero has a good shot at it and it has some very high-powered backers with decades of experiencing building just such Internet behemoths.
They include the likes of Paypal co-founder and early Facebook investor Peter Thiel, TradeMe founder Sam Morgan and the founder of Australian accounting software group MYOB, Craig Winkler.
Xero really took off after it raised US$150 million in an apparent blink of an eye in October from Thiel and other US and local investors. The first paragraph of the announcement of the capital raising set out their ambition -- to take on and beat US giant Intuit in the contest for 29 million customers there.
No New Zealand has ever had a real shot at dominating a part of a global market before.
Some may wonder how a relatively small New Zealand company could do it and why the unsexy business of small business accounting could be so lucrative.
Xero's 'ecosystem' of add-on services is the key and it has the potential to create a flowering of many, many cloud computing companies in New Zealand.
Xero loves helping and working with these 'add-on' companies, which include the likes of point-of-sale cloud software firm Vend and GeoOp, which makes software for tradies to book and invoice jobs on the move.
GeoOp listed on the junior NZAX market last month at NZ$1 and quickly sprinted to as high as NZ$3.64 this week. Investors who think about how small businesses operate for a moment or two are quickly realising Xero could become the centre of everything business does online and in the cloud, ranging from payrolls to invoicing and payments.
These are rocket ship rides for investors and a huge boost for our stock market, which for too long was seen as a moribund place full of mature dividend-producing laggards.
It's also much more encouraging than the last time New Zealand's stock market was generating this sort of excitement. Back in the mid 1980s the market's rock stars were property developing financiers who borrowed and bought everything with the hope of selling it on at a profit.
Now the likes of Xero and GeoOp make real services that are being sold directly in huge global markets.
It will be a roller coaster ride, but it's one New Zealand investors need to see up close and personal.
They may even jump on for fun.
13 Comments
Remember the saying..if anything is too good to be true ?
Still, it is nice that this company has been noticed and has had a good ride so far...May be wise to cash in when the going is good ?
Remember Rakon ? For every buyer, there is a seller laughing his way to the bank.
If its not a bubble it will do till the bubble gets here....
This speaks of the investors, less the company.. its a wall of money there...
For what xero does it does it very well compared to others. Thought its not like suburban accountants live high on the hog. Rising above that will be tuff, we remember SAP family/insiders bought some SI farms a yr or two ago and the army of sap experts at $2,000 + a day often prove hard to move on
As an aside google sap on demand to see even the experts can drop s few billion on occasion.
Hoping wise heads use the publicity to secure many more much needed paying customers.
"The astonishing rise of Xero" or should that headline be "The astonishing rise of Xero share price' There is a difference.
It might well be a good company. Hopefully after all the dust settles it will still be there and thriving. But it does have a chance of being royally screwed by the share traders and NZX marketers and the trouble they cause.
Hear hear. It's always wonderful to see a share price zooming inexorably and improbably upwards, but it's also worth keeping an eye on the fundamentals.
Sometimes a tech company manages to defy all logic and the odds to become truly, monumentally profitable and stable after years of ever increasing losses - but more often they crash and burn after failing to achieve critical mass.
I can't help but think that Xero's cost to grow and expand overseas is going to cost them an absolute packet - redeveloping their platforms to accomodate US state business and tax laws will burn cash at a ferocious rate, never mind the sales and marketing expenditure.
At what point does a growing tech company need to signal a profit? At what point do investors get impatient? At what point does growth without profit stop being impressive and start looking reckless?
I guess nobody really knows, which is why it's such fun to watch!
It was a one way bet after the capital raising, it finally showed those on the inside put their money where the market pitch was, it was a long time coming.
Anyone with common sense should have taken some money off the table by now. A lot of orginal and post-capital raising investors have made good money...actully twice now...a lot have bought in twice and now exited which is great. The expectations are now so high they have a real challange to make the revenue and utlimately profit targets that will go with maintaining the share price.
The easy way out would be a takeover. Good for the investors..so good for NZ?
Xero is probably the only thing that makes the residential property market look rational.
It's fantastic we have a company who is going great guns and building something. But it hasn't yet succeeded, and all this back slapping of success smacks of immaturity. Dont forget in its last financial year it had revenue of only $39m, and from the looks of it will only produce revenue of $70m, and massive losses.
I'm all for what xero is trying to do - but it's share price and enamored industry commentators is just another sad example of the financial illiteracy of our kiwi culture.
As a xero user for a good few years now I would say that the product works just great. That is a fact. The only thing that troubles me is "who owns the data, yes it is my data but, it turns out I am not actually the subscriber, my accountant is. Now that does not sit well with me, my accountant can turn around and deny me access to my own data. If I want to move accountants I have to ask my old accountant for permission. If I ask xero to make me the subscriber not my accountant they say to ask my accountant. So as a user I am having a few doubts all of a sudden.
Not to mention the security issues of the cloud in general. It will only take one serious data security breach at Google to put us all into a panic.
As it is anyone with the right clearance at work or in worldwide security or enforcement has access to anything of yours on the net, not to mention any criminal outfit able to hire/blackmail/threaten the right brains.
I hope this succeeds. Our very own Infosys potentially. The only question I have is that if this business goes on to great success will it need to out source the bulk of its labour to stay ahead of the game? The real benefit to NZ would be for Xero to have 20000 highly skilled, highly paid employees based in NZ. Then we'd certainly start to see the beginnings of a more productive economy. The profits coming into NZ will be great but the labour share even better.
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