Broker recommends offloading Xero shares

Xero founder and chief executive Rod Drury. Photo / APN

Broker Craigs Investment Partners has slapped a sell recommendation on Xero shares after initiating research coverage on the New Zealand developer of online accounting software.

In a note to clients, Craigs said that with an enterprise value to revenue multiple of 21x the market was pricing in "a more rapid take off in US growth" for Xero than "we think is likely".

Xero shares tumbled 15 per cent last week to hit a 10-month low of $20.17 on Friday, 55 per cent below the $44.98 record high they hit in March.

But the stock has rebounded strongly this week and shares were trading up 2.1 per cent at $23.49 just after 11am this morning, valuing the company at $3 billion.

Craigs has placed a 12-month target price of $18.90 on Xero shares.

The brokerage said it acknowledged the scale of the opportunity the US presented to the company and the firm was well-positioned to deliver solid growth in New Zealand, Britain and Australia.

However, much is hanging on the success of Xero's push into the US accounting market, where the company estimates it has 29 million potential customers.

At March 31 the company had 18,000 US clients, a roughly 1 per cent share of that county's small businesses market.

At the time of Xero's annual meeting last month chief executive Rod Drury declined to give numbers updating the company's US progress in the current financial year or its predictions for growth in the world's biggest economy.

Investors should "not expect too much over the next few years", he said.

On Friday Harbour Asset Management managing director Andrew Bascand also questioned Xero's US expansion and the company's valuation.

"Let's be truthful, how many clients do they have in the US right now?" Bascand told BusinessDesk. "This was never going to be an easy path for Xero but their company is growing as well, it's just a question of what valuation it should be on."