Xero stock gets pummelled

Rod Drury. Photo / Dean Purcell

Shares plunge below $20 after Goldman Sachs issues sell recommendation

Xero shares have taken a pummelling, plunging to a one-year low after analysts questioned the New Zealand online accounting software developer's growth in the US.

The stock, which hit a record high of $45.99 in March, tumbled below the psychologically important $20 level for the first time since October 2013 yesterday, closing down 8.6 per cent at $19.15 last night.

Following a trading update from Xero on Thursday, Goldman Sachs slapped a sell recommendation on the company's shares, saying customer growth in the US had been disappointing and the firm's major rival in that country, Intuit, was experiencing increased success with its Quickbooks online product.

In a research note Goldman analyst Robbie Aitken said the firm's latest trading update showed "solid trends" in this country, Australia and Britain.

However, the 4000 US subscribers Xero had secured during the first half of its current financial year was disappointing, he said.

"We believe structural factors will lead to slower growth in the US at a time when [Intuit] is having renewed success with its Quickbooks Online offering."

Thursday's trading update came three weeks after the company announced the sudden resignation of its recently appointed US chief executive, Peter Karpas.

Goldman, which previously had a neutral recommendation on Xero, has a 12-month price target of $18 on the stock. Deutsche Bank maintained its sell rating following Thursday's update, saying growth was "extremely weak" in the US but strong overall, while lowering its 12-month price target from $18.90 to $18.50.

Wellington-based Xero had 22,000 paying customers in North America as of September 30, up from 10,000 a year earlier, according to Thursday's update. Paying customers in New Zealand rose 38 per cent from their September 2013 level to 119,000, while Australian customers doubled to 158,000 and UK customers increased 103 per cent to 61,000.

Xero had a total of 371,000 customers at the end of last month, 76 per cent up on the same time last year.

Chief executive Rod Drury said he was disappointed by the view Goldman had taken.

"We're one of the best Saas [software-as-a-service] companies in the world," Drury said.

Xero's annualised revenues are now running at $132.3 million, up 87 per cent on the same time last year.

"I'm sure that if we're not the best we're in the top one or two in the world at those growth rates," Drury said. "We're doing exactly what we said we'd do. We said we'd focus on New Zealand and Australia for the last couple of years and those are massive markets and they're paying off."

Drury said Xero was well-positioned against Intuit.

"[Goldman's view] doesn't reflect the picture we see," he said. "We've beaten Intuit in three markets."

He said New Zealand-based analysts didn't understand "the significance of what we're doing".

Xero also announced on Thursday it had secured high-profile expat New Zealander Andy Lark to become its chief marketing officer. The company expects a net loss of $25 million for the six months to September 30.