Is Xero Overvalued?
With the Xero share price up ~20% in the last month, we look at how Goldman currently views the cloud accounting software heavyweight.
- Xero on April 1 announced it had completed its Planday and Tickstar acquisitions
- The stock is up over 20% in the last month
- Goldman recently reiterated their Buy rating on Xero and described the acquisitions as positive
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Is Xero (ticker: XRO) overvalued? According to Goldman and at current price levels: the answer is no.
Before we get to that, let’s look at some of Xero’s recent developments:
In early March, Xero announced it would be acquiring Planday, a leading workforce management company.
Planday key facts:
- The company boasts more than 350,000 employee users
- It is an open platform that leverages cloud-based technology (like Xero)
- The company operates primarily in Denmark, Norway, Sweden and the United Kingdom
In the most basic of terms and as Xero described it: 'Planday is an open platform that integrates with Xero, other accounting solutions and third-party workforce-related apps, to deliver a real-time view of staffing needs and payroll costs, alongside key business performance metrics.'
Financial facts: Xero said it would acquire Planday for an upfront payment of €155.7 million and earnout considerations of up to €27.8 million – taking the maximum consideration to €183.5 million.
Approximately 45% of the upfront consideration will be paid in Xero stock, with the remaining 55% settled in cash.
A few weeks later, Xero would announce an additional acquisition, on March 24 revealing plans to acquire e-invoicing company Tickstar.
Aligned with Xero’s strategy of building out its cloud footprint, Tickstar's technology provides customers with 'a well-established e-invoicing network that enables faster and more secure transactions.'
As with Planday, Tickstar is based in Europe – Stockholm specifically – and has customers across a number of global markets.
Financial facts: Xero said it would acquire Tickstar for an upfront payment of SEK 60 million and pay out performance-based milestones of up to SEK 90 million – taking the maximum consideration of the acquisition to SEK 150 million.
Approximately 50% of the upfront consideration will be paid in Xero stock, with the remaining 50% settled in cash.
Xero Share Price ↑
Whether or not these acquisitions influenced price action significantly, over the last month the Xero share price has performed strongly, rising approximately 23% in that period. In the last year the stock is up 79%.
Xero opened Monday’s session at $140.25 per share.
Analysts from Goldman Sachs said they were positive on these acquisitions, noting that it would help accelerate the company's platform strategy while also help Xero grow its reach in the Scandinavian region – which Goldman views as a favourable market.
‘We estimate a TAM of 2.2mn subs for its accounting software, while having favourable market characteristics,’ said the analysts.
From a valuation perspective, the investment bank reiterated their Buy rating, though lowered their 12-month price target to $153 per share, still ahead of XRO’s last traded price.
Xero is set to report its full-year (fiscal 2021) results on May 13.
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