Xero hits new high on analyst upgrade - why it could go higher

Xero chief executive Steve Vamos. Photo / Supplied

Xero shares rose 4.9 per cent to an all-time high of A$112.95 in Thursday trading - giving the cloud accounting software company a market cap of A$16.1 billion ($16.4b).

Had it remained on the NZX, Xero would now be the second most-valuable local company behind Fisher & Paykel Healthcare.

The now ASX-only firm has been on a bull run since a mid-August update that revealed it was still adding subscribers, in all is major territories, despite pandemic lockdowns - if at a slower rate than 2019.

The latest surge was fuelled by an October 7 research note from RBC Capital Markets, which upgraded Xero to outperform and hiked its 12-month target price from A$92 to A$123 (for a A$17.6b market cap).

That target implies some heady multiples. Last year, Xero made a net profit of $3.3m and ebitda of $137.7m on operating revenue of $718.2m. RBC's team of analysts is picking ebitda of $179.7m for 2021 and $387.3m by 2023.

But RBC is picking there will be further stimulus spending that will keep small businesses (Xero's main target) relatively buoyant.

And the wealth manager also sees Xero continuing to do well in its "Battle for Britain" with Sage, based on Google Trends search results - which it, in turn, sees as indicative of what accounting software is catching the attention of would-be subscribers.

Ditto for Australia, where Xero is more searched-for than arch regional rival MYOB.

The only flat point in the Google Trends analysis is the US, where Intuit's Quicken remains the dominant household name and Googling for "Xero" has plateaued. Current chief executive Steve Vamos has put less emphasis on cracking North America than his predecessor Rod Drury - although Craigs Investment Partners research analyst Stephen Ridgewell - a Xero bear - recently told the Herald that the company would need a breakthrough in the US to justify its current valuation.

RBC finds a second largely positive external indicator, too, saying "app download data continues to improve over recent months which augurs well for Xero subscriber growth".

While many use Xero's software via the web, analysts can track numbers for its iOS and Android downloads, which have lifted 3 per cent for the calendar year.

The UK - which accounts for about 20 per cent of Xero sales - is vulnerable to a second lockdown, but RBC sees stimulus spending and gains from Sage offsetting any impact.

RBC also notes that Xero has put off modest price increases, and offered more features for the same money in the meantime (for example, unlimited invoices rather than 20 per month with its Starter version) it has managed to avoid rivals' deep discounting and three months' free deals.

Xero continued to climb as Friday ASX trading opened, with shares up 0.27 per cent to a fresh all-time high of A$113.26.