How will that play out when Xero delivers its first-half FY2024 result on November 9?
Wealth manager Jarden is a bit more bullish than the pack, estimating that operating profit will come in 2.5 per cent above the analyst consensus.
Jarden analysts Elise Kennedy and Tom Beadle have an “overweight” rating and a 12-month price target of A$129.00.
Xero shares were recently trading at A$106.22 (a volatile period for tech stocks as a whole has seen the stock swing between an A$62.85 low and an A$127.68 high over the past 12 months).
Jarden sees Xero as being caught up in the broader tech sell-off. Although redundancy costs could weigh on the first-half numbers, Kenndy and Beadle see underlying numbers as strong and see more cost-saving opportunities as Xero reviews its IT systems.
With the first half result, they’re looking for a revised strategy for the United States market, where Xero has previously struggled to make headway against the incumbent Intuit. Partnerships are seen as a way of avoiding the “overspending” of the past.
The bear take: A$75
Morningstar tech analyst Dr Roy van Keulen had the opposite take in an October 21 note, which gave Xero a “fair value estimate” of A$75.00 per share.
“At current prices, Xero shares screen as materially overvalued,” van Keulen said.
“We believe Xero experienced a temporary tailwind after the onset of the Covid-19 pandemic, due to supportive fiscal and monetary policy artificially boosting business creation levels and suppressing business failure rates.”
Now, Morningstar sees the tailwind subsiding, or even reversing.
In Australia - Xero’s largest single market - business exits rose 27 per cent in the 12 months to June 2023 from the prior year and accounted for 15 per cent of total businesses, from 12 per cent in the previous year. Meanwhile, new business entries declined by 14 per cent.
The analyst sees similar trends hitting Xero’s business in NZ.
“We believe a normalising business environment will result in Xero having to spend an increasingly large share of its sales and marketing budget to replace churned customers, which leaves increasingly less budget to fuel subscriber and revenue growth,” van Keulen said.
Van Keulen added, “Further complicating Xero’s business is the increasing cost to acquire new subscribers, due to intensifying competition internationally and market saturation in Australia and New Zealand.”
Chris Keall is an Auckland-based member of the Herald’s business team. He joined the Herald in 2018 and is the technology editor and a senior business writer.
