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We first had analysts at UBS claimed that the cloud accounting business Xero Limited (ASX: XRO) The fund manager, John Hempton, said: The Australian Financial Review believes that its valuation could to reach 100 billion dollars.
Xero currently has a market value around $ 100 billion valuation would mean a stock price of about $ 700 if the group 's equity remained unchanged. impossible if you consider that the company would probably need to generate profits of nearly $ 3 billion to get close to a valuation of $ 100 billion on a multiple profit of about 30x [19659004]. NZ $ 489.4 million, but mainly on a high gross profit margin and an increase of 81%.
Of course, the company will not be able to grow at rates high enough to generate more than $ 5 billion in revenue to $ 3 billion in New Zealand without continuing to invest heavily in the marketing needed to produce strong growth in the turnover. During fiscal year 2018, sales and marketing expenses accounted for 48% of operating revenues, with product design and development costs accounting for 35% of total revenue
. In other words, if the total cost of Xero for the registration of a customer on a new market is $ 30 and the customer pays him $ 25 the first year, the cost of Subscription or recurring revenue from the business will increase. Xero would record a net loss of $ 5 on the transaction
However, during the second year and beyond, Xero's support costs to serve the customer are minimal (due to its nature of service) and all marketing expenses are backed up. This could mean, for example, that the customer pays back $ 30 in the second year, while it incurs operating expenses of only $ 6 out of an 80% gross profit margin.
Still, for Xero at 10x or more recurring revenue it will have to grow like nuts in the UK and in new markets ex-ANZ and the United States. It is also worth remembering if Xero has a first class product, it has the opportunity to steadily increase its prices.
It will be necessary to do all this while managing the marketing and product development costs that will be required for the company to reach the truly global scale that, according to Mr. Hempton, could do it. Backbone of a Global Small Business Accounting System
This panglossian view of Xero should be placed in the context of the competitive environment in which it operates with a powerful and well-financed competitor in Intuit The Operator Of Quickbooks And Others Like The British Sage Or The Own Myob Group Ltd. (ASX: MYO) from Australia also competing for market share.
And let's not forget However, it should be noted that Intuit is now valued at 74 billion Australian dollars adjusted for currency effects, with an adjusted profit of about 1 , 95 billion US dollars on US revenue. While the health giant CSL Limited (ASX: CSL) is now valued at over $ 90 billion, it expects a net profit adjusted for foreign exchange impacts of about $ 2.3 billion These comparable earnings may seem exciting, but Xero recently lost the man that many saw as the driving force behind the resignation of Rod Drury as CEO in order to occupy a non-executive position. role of director
. Drury and other senior executives have also recently sold their own shares in the sector.
I do not think Xero shares will reach $ 700 over the next decade, but strange events have already occurred …
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Tom Richardson, Motley Fool contributor, owns shares of CSL Ltd. and Xero.
You can find Tom on Twitter @ tommyr345
The Motley Fool Australia owns shares in Xero. We fools may not all have the same opinions, but we all believe that taking into account a wide range of perspectives makes us better investors. The Motley Fool has a disclosure policy. This article contains only general investment advice (AFSL 400691). Authorized by Scott Phillips.
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