Why the Xero Share Price fell 3.06% This Morning

After making moderate gains yesterday morning, Xero Limited [ASX:XRO] has continued its downwards slide from yesterday afternoon. It opened today at $48.70 per share, from $49.69 on close. This morning has seen the online accounting and business service platform down by 3.06%, currently trading at $48.17 at time of writing.

Xero is a world leader in providing cloud-based accounting software. However, with the latest financial year loss of negative NZ$69.06 million and a trailing 12-month of negative NZ$46.22million, there is cause for concern over Xero’s road to profitability — when will it break even? Its market cap of $6.98 billion helps alleviate its losses by moving closer towards its target of breakeven.

What caused Xero share price to fall?

What could have caused the sharp fall? Perhaps after months of mediocre performance, investors are not willing to wait around to see to find out when — or if — Xero will break even. Analysts are predicting the company will post a final loss in 2018, before turning a profit sometime in 2019.

Keeping this in mind, Xero has just announced a hunt for new acquisitions, and plans to raise US$300 million through an issue of convertible notes it will list in Singapore.

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Xero has started the search for potential acquisitions, buying Canada’s Hubdoc in August for up to US$70 million. Yesterday the company said it planned to build a war chest for other investments. Perhaps this spending spree isn’t sitting well with more profit-minded investors?

What’s next for Xero?

On a morning with a shaky start to the ASX, it’s hard to be too critical of Xero or read too much into this drop. Nevertheless, with big announcements made overnight regarding new and forthcoming improvements to the cloud-based accounting platform, it’s a good guess this wasn’t the performance Xero would have expected this morning.

With successful expansions into overseas markets, Xero’s next challenge will be to take on Intuit Inc’s QuickBooks in the US. QuickBooks has the financial resources and the customer base to fight a major battle with Xero.

There are signs the battle for the US economic market is going to be difficult for Xero.

Difficulties with US payroll and the complex state tax system makes it harder to market a generic accounting software.

If Xero is able to acquire a suitable company it might make it’s foray into the US easier, with chief executive, Steve Vamos, citing the opportunities to enhance its small business platform.

We see the additional financial flexibility provided by this offering as supporting the significant opportunity we have to enhance and extend Xero’s small business platform and ecosystem capabilities through the pursuit of complementary targeted acquisitions.’

It’s worth pointing out that Xero has largely funded its operations from equity capital, and its low debt obligation reduces the risk around investing in the loss-making company. Meaning it is worth keeping an eye on this company, especially if they can hit positive cash flows next year.

Regards,

Ryan Clarkson-Ledward,
For Money Morning

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Ryan Clarkson-Ledward is an Editor at Money Morning.

Ryan holds degrees in both communication and international business. He helps bring Money Morning readers the latest market updates, both locally and abroad. Ryan tackles all the issues investors need to know about that the mainstream media neglects.

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