Is Xero the Hero for New Zealand Stocks? Technology Company has Nearly Doubled in Value in Last Two Weeks

Is Xero the Hero for New Zealand Stocks?

Technology Company has Nearly Doubled in Value in Last Two Weeks

LUCY CRAYMER

Nov. 7, 2013 10:53 p.m. ET

WELLINGTON, New Zealand—One of the Asian-Pacific region’s best-performing stock markets is being driven by an unlikely source: a technology company backed by PayPal founder Peter Thiel that has yet to make a cent in profit. A 21% increase in New Zealand’s NZX-50 so far this year reflects in large part rapid stock gains by Xero Ltd. XRO.NZ +3.56% , dubbed by broker Credit Suisse CSGN.VX -0.04% as the ” Apple Inc. AAPL -1.62% of accounting.”Investors are betting Xero’s cloud program for small businesses to organize their finances, bill customers and keep a track record of payments will be highly profitable once the Wellington-based company slows the investment being made to build a footprint in new markets, including the U.S.

That hope has made Xero’s shares a hot ticket among investors including Mr. Thiel’s Valar Ventures and New York-based Matrix Capital Management. In the last two weeks, Xero has nearly doubled in value to 4.6 billion New Zealand dollars (US$3.8 billion) to become the NZX-50 index’s second-largest stock after construction firm Fletcher Building Ltd.FBU.NZ +1.16% Since the end of last year, Xero shares are up 374%.

The rapid rise in Xero’s stock has also cast a light on efforts by New Zealand, a small mountainous country of 4.5 million people in the South Pacific, to become less reliant on agricultural exports such as dairy and wool for growth. Tax breaks and other incentives have turned digital products from a small contributor to the economy into a NZ$2 billion export industry, with special effects in movie blockbusters such as the Oscar-winning Avatar and The Hobbit largely produced in New Zealand. Exports of computer and information services have grown at more than 10% annually since 2002, government data show.

“We can be bigger than Fonterra,” Xero founder and chief executive Rod Drury said, referring to Fonterra Cooperative Group, the world’s biggest dairy exporter. “The way we think about the business long term is how do we be Facebook FB -3.18% -sized for small business. That is obviously a lot bigger than Fonterra or any New Zealand company.”

Still, the sharp rise in Xero’s stock is raising concerns that investors may be headed for a fall. Xero doubled its revenue in the year through March, but sales of NZ$39 million represent only a fraction of its current market value. At the bottom line, it recorded a NZ$14.4 million annual net loss.

“What makes the stock worth a billion dollars more than it was three days ago?” said James Smalley, a director at Christchurch investment firm Hamilton Hindin Greene. “If you are looking at where you are going to allocate your capital then one would argue there are cheaper places with an appropriate level of risk to put that money.”

Andrew Bascand, managing director of Harbour Asset Management in Wellington, pointed to a disconnect between Xero’s rating and other listed technology firms such as Wynyard Group Ltd. WYN.NZ -1.64% , SLI Systems Ltd. SLI.NZ +2.60% and GeoOp Ltd.GEO.NZ -10.09% Xero is trading at 70-times sales, compared with the other companies’ multiples of three or four times revenue.

Xero’s shares fell 9% Thursday, before clawing back much of those losses to trade at NZ$35.98 Friday. Some brokers see Thursday’s decline as merely as a blip. Credit Suisse initiated coverage of the company this week with an outperform rating on the stock and a target price of NZ$45.70.

Xero’s share price has been on a rapid upward trajectory since February, which analysts say is mainly due to the company consistently meeting forecasts for revenue and customer addition.

However, it was a successful NZ$180 million fundraising in October, which led local and international investors to pile in. Valar Ventures and Matrix Capital Management took part in the equity raising at NZ$18.15-a-share, which secured NZ$147 million in the U.S. alone.

Valar Ventures was an early supporter of the stock—investing NZ$4 million in 2010 in return for a 3% stake in the company. Then Xero was operating out of cramped, no-name offices in central Wellington. Now, its head office in Wellington is one of the city’s most prominent buildings, next door to the New Zealand stock exchange on the city’s waterfront.

Andrew McCormack, a partner at Valar Ventures, said in an email that Xero was at an “inflection point” in its efforts to accelerate growth in the U.S. and cement its position as a leader in cloud computing.

Xero, founded in 2006, currently has more than 211,300 customers and 600 staff in 14 offices around the world, including newly fitted out offices in San Francisco and Denver. The company also listed on the Australian Securities Exchange late last year.

Making a profit “is not that important at the moment,” Mr. Drury said. “We’ve just raised US$150 million in new capital, which investors have given us to grow a long term business. We’d like to get to break-even as soon as we can but we have the capital to invest ahead of growth.”

Milford Asset Management was one of the few local funds to participate in Xero’s recent capital raising. According to Brian Gaynor, chairman of Milford’s investment committee, the fund has become more enthusiastic about Xero as the software company successfully raised more and more capital.

“With a company like this you watch every announcement they make,” he said. “These things can get overheated, they can have a sales figure that is more disappointing than the market anticipates and they can come back a long way. We are there but we’re not unequivocally there.”

Andrew Heathcote Rich Lists editor

The next Steve Jobs? Craig Winkler makes $96m in a day from Xero, the ‘Apple of accounting’

Published 07 November 2013 11:47, Updated 07 November 2013 14:25

Craig Winkler has 96 million reasons to smile. Photo: James Davies

The 18 per cent rise in the share price of accounting software company Xero on Wednesday makes it a bigger company than tech favourite SEEK and delivered a windfall gain of $96 million to Rich 200 member Craig Winkler.

Xero has enjoyed phenomenal growth on the ASX since its debut on November 8, 2012. In the year since, its share price has risen by 660 per cent to close at $34.20 on November 6. This lifts its market capitalisation to $4.36 billion.

The growth has led to investment bank Credit Suisse dubbing Xero as the “Apple of accounting”.

In early trading on Thursday, Xero is 5.9 per cent higher at $36.20.

Xero sells accounting software and uses cloud computing technology to keep prices low.

The biggest beneficiary of Xero’s share price growth is its chief executive Rod Drury. The New Zealander’s shares were worth $743 million at the close of trading on November 6.

Melbourne-based Winkler made his first fortune from another accounting software company, MYOB. He exited the company in 2008 when he sold his 28 per cent stake for about $125 million.

A year later, Winkler spent about $15 million on his Xero stock. He remains a non-executive director of the New Zealand based company, of which he owns 16.4 per cent. As of yesterday, Winkler’s stake was worth $632 million.

More than money

Most of Winkler’s Xero shares are held in a charitable trust. An active Christian, Winkler is a long-time supporter of indigenous causes. Little is known about Winkler’s plans for the money but he appears to be on the verge of making one of the biggest philanthropic gifts in history.

That is if Xero shares can maintain their momentum. Investors fondness for Xero stock is largely based on speculation. In its full year report for the year to March 2013, Xero reported a $NZ14.4 million ($12.7 million) loss on revenue of $NZ39 million ($34.3 million).

This means that its market capitalisation is a staggering 127 times larger than its most recent full year revenue result.

Investors’ confidence about the company’s ability to grow was buoyed on October 3 when Xero informed the market that it was set to exceed NZ$30 million ($26.4 million) in operating revenue for the first half of the 2014 financial year.

Among other achievements, the 18 per cent surge on November 6 made Xero larger than employment classified business SEEK.

SEEK, which is worth $4.34 billion, is widely regarded as one of the best technology companies ever to come out of Australia.

In contrast to Xero, SEEK reported revenue of $620.2 million last year and a $141.1 million profit.

Companies smaller than Xero by market cap*

SEEK, $4.34 billion

Toll Holdings, $4.11 billion

Bank of Queensland, $3.90 billion

Harvey Norman, $3.44 billion

Qantas Airways, $2.72 billion

Seven Group Holdings, $2.44 billion

*As of the close of trading on November 6