In a post-earnings note - which inspired Friday’s modest rally - Goldman Sachs said investors should be picking up shares while they’re down.
Goldman said healthy average revenue per user numbers, and a regulatory change in the US that will push more sole traders and small businesses to digitise their accounts, “suggests a strong revenue trajectory into 2023”.
The wealth manager reiterated its buy rating, and upped its 12-month price target to A$115.00
On the other hand, Jarden put its rating from “buy” to “overweight” and slashed its 12-month price target from A$93.00 to A$67.74.
Analysts Elise Kennedy and Tim Halliday said Xero was a high-quality business, the first half was weaker-than-expected for Xero’s US and UK business, and it was unclear if it could regain momentum, and “macro headwinds” with economies under pressure. “A change of CEO may make navigating these challenges harder,” the Jarden pair said.
Xero reported a $16.1 million first-half loss, up from a $5.9m net loss in the same six months a year earlier.
Revenue rose 30 per cent to $658.5m for the six months to September 30, but subscriber growth slowed as the number of paying users increased 16 per cent to 3.5 million against the 19 per cent growth in the first half of last year.
Xero chief executive Steve Vamos (65) will step down in February next year after five years in the top job and will be replaced by Sukhinder Singh Cassidy.
Sukhinder, who will join Xero on November 28, is an experienced Silicon Valley executive with more than 25 years’ global experience. She has been president for Asia, Pacific and Latin America for Google, president of ticket scalping site StubHub and a director of TripAdvisor, but is best known as the founder of San Francisco online video marketing startup Joyus, bought by StackCommerce for an undisclosed sum in 2017. (Indicators of the scale of the deal are few and far between. A Wall Street Journal report at the time noted Joyus had “raised more than US$50m from investors including Time Warner”).
Josh Gilbert, market analyst with Australian “social investing” platform eToro, said the departure of Xero’s CEO added a fair amount of uncertainty for shareholders at a time when the company had just missed earnings expectations.
But Goldman Sachs highlighted that Singh Cassidy will be based in the US (Xero’s original chief executive Rod Drury, was based in NZ, Vamos in Australia). That suggested the huge North American market could be an area of increasing focus for the firm.
Earlier, Jarden’s Kennedy and Halliday said Xero should benefit from a US Government push to digitise tax returns for small businesses. They say it should lift Xero in that country, just as similar moves in Australia and the UK buoyed the firm’s business there. Even if Xero’s market share remains static, it will be a slice of a much larger pie.
It’s still not clear whether the US$15m Congress allocated to the Internal Revenue Service will result in a breakthrough that will see US small businesses break with the consultants and Turbo Tax software they use to negotiate the current, very complex setup, however.
As things stand, North America remains Xero’s smallest major market. In the six months to September 30, its North American customer base grew by 15 per cent year-on-year to 354,000.
Over the same period, Xero’s NZ subs grew by 12 per cent to 536,000, its UK subs by 14 per cent to 894,000 and its Australian subs by 19 per cent to 1.47m.
Customers in the rest of the world grew by 20 per cent to 242,000.
Xero shares were down 0.3 per cent to A$69.89 in early Monday trading on the ASX.
