Xero shares recover after early hammering

Shares in cloud-based accounting software firm Xero [NZX:XRO] have extended their recent decline – opening today at $15 before recovering some ground during the morning.

Xero’s share price has dropped more than 25% in the past month as investors question the company’s pace of growth in the US, where it is competing against incumbent Intuit.

This morning’s initial decline was based on some large trades indicating institutional selling before the market opened, says James Smalley, a director at Hamilton Hindin Greene.

But by midday Xero shares had bounced off that low to trade at $15.60, down 2.8% on yesterday’s close.

Of the 380,000 shares traded this morning, about 240,000 (63%) were institutional crosses before the market opened, Mr Smalley noted.

“It does tend to give one the indication that the majority of the selling is coming from the institutional side of things.

“And, as everyone knows, those shares came out of escrow from the capital raising over a year ago at $18.50.”

Xero has also been re-rated by analysts after its operating update a fortnight ago.

Several analysts downgraded their 12-month price targets, citing what they described as disappointing US figures.

Xero said it had added 4000 US customers since March for a total of 22,000. Analysts had wanted to see faster progress and there are now concerns about the company’s cash burn, which could lead to another capital raise.

At the height of its run-up, in March, Xero was worth more than $5 billion, making it the second most valuable company on the NZX behind Fletcher Building.

Today, Xero's market cap is $2 billion.

Xero chief executive Rod Dury says the company is still in the early days of its push into the key US market.

With $171 million in the bank, Xero has all the cash it needs for a sustained fight against North American incumbent Intuit, Mr Drury says.

The move to the cloud has provided a strategic opportunity to break Intuit's grip on the small business market and to woo the majority of small business customers who have never used any accounting software.

Xero wants a million customers worldwide and is targeting growth in the US market where so far it has some 22,000 of its total 371,000 customers.