Quick Byte #3: Xero
The third and final instalment of our Quick Bytes series is in. And this time, we’re summarising the notes we made at the UBS Emerging Companies conference on accounting software provider Xero.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Graeme Robinson
:
Interesting MYOB’s float and feel their biggest risk is how Xero go in the USA. See that Xero’s success or failure depends on cracking the US market, and if they achieve this their future software development costs per user will be considerably lower than MYOB or Quicken.
Personally feel the competition for these two would then be extreme.
The other side is Xero is the only one of the three companies offering a ‘full’ cloud software, which I see will be the more popular with users going forward than still having to have the software installed on your computer.
Roger Montgomery
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Customer told me that once xero fixed their pricing they couldn’t wait to switch
Robbie
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Not sure if we’re allowed to post links here, but there’s some interesting commentary on Xero in this article:
http://www.nzherald.co.nz/markets/news/article.cfm?c_id=62&objectid=11241055
Roger Montgomery
:
This link is OK.
Robbie
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I bought XRO at $1.40 (on the NZX) a few years ago after watching their presentation at a small business expo and thinking that they had huge potential.
Just plain dumb luck really – it was a purely speculative play as at the time I had no idea about valuing a company!
I’ve since learnt a heap about value investing (thanks Roger) – sold out at $20 when I saw the market cap and how much assumption on future earnings had been factored into the price! Perhaps it was a bit premature but at least I locked in a good profit.
It’s interesting to note that the founder(s?) of MYOB bought into XRO a couple of years ago- perhaps they could see the writing on the wall?
ashley.little.581
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XRO talk the talk, but as yet they don’t walk the walk. $3.5B in market cap and losing $35M in 2014.
I know this industry fairly well and don’t think their technology is disruptive in the least. What they do is nothing new and easily replicated.
It’s just the most over hyped stock I have seen in a very long time!
Nospam Nospam
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I’m the Principal of a suburban accounting firm and I’ve (virtually) banned MYOB from my practice.
I recently watched one of my few remaining MYOB clients (the rest are now Xero) get told by its national bookkeeping contact organisation (you’d recognize the name) to switch to Xero or stop being a client. It wasn’t a suggestion – it was a directive.
MYOB has finally moved on. They just needed enough accountants and bookkeepers to abandon them (and abandon they are).
Unfortunately, too little too late.
Cheers.
Bryant Bice
:
Is it possible to calculate an intrinsic value for XERO?
Roger Montgomery
:
Not without a great deal of speculation.
Lee Shan
:
Hi Roger. The share price has come off recently and is now trading at $26. What are your thoughts on it now?
Roger Montgomery
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It’s as much a punt at $26 as it was at $45. It might be a very profitable punt but you must recognize it’s a punt.
Nick Ogle
:
Interesting notes & on the money. As a user of Xero I can vouch for how good the offering is. Also, as their solution was architected for the cloud from day 1 they have a huge advantage over the older more established players who have to do a huge amount of work to get their solutions truly cloud enabled. Its akin to the challenge the big banks have with their legacy Mainframe systems.
all that being said I can’t justify ever buying the shares at the current price.
Andrew Legget
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I have been inteterested in learning about Xero ever since i came across a glowing endorsement from john Hempton of Bronte Capital. It sounds like the type of speculative play that has great potential upside if things go their way.
I say speculative as, same to what you have mentioned, they are currently not making a profit.
The point about reckon and MYOB being “no threat” is a big one. I know this is a point form summary but the impression that two companies that were quite popular in accounting software are suddenly no threat is a great insight.
Bolt on service additions do seem to be an obvious growth opportunity for when they decide to stop seeking market share and start seeking max profitability.
I have really enjoyed these quick byte posts Roger, thanks to all your team for sharing them..
wade.number
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I spoke to my accountant and turns out a lot of them are urging customers to switch to Xero because of real time interaction function.
My accountant also mention people will still use MYOB and Reckon
zoran arnautovic
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NXT,CVO and XRO
1.Why would Montgomery Big Guns even bother to attend UBS ECc.
2.They even took some notes.
3.Stay tuned.
Cheers
Roger Montgomery
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We can learn a lot about the incumbents by talking to the disruptors
Andrew Legget
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Very good point Roger. The section in “The Snowball” where Bill Gates tells the Ben Graham group that Kodak was toast after one member put it up as a potential good stock is a great example.