Xero’s First-Half Result Doesn’t Justify Share Price Rally

We don’t believe the 10% share price jump that followed narrow-moat rated Xero’s interim result was justified by the company’s first-half performance. Generally speaking, the result was in line with our expectations, and we have maintained our earnings forecasts. Our fair value estimate has increased by just 1% to AUD 46.00 due to the time-value-of-money effect on our financial model, and we continue to believe the shares are significantly overvalued. At the current market price of AUD 73.89, Xero trades on an expensive fiscal 2020 enterprise value to revenue multiple of 15 and price/earnings ratio of 266. We expect Xero will report a maiden annual profit in fiscal 2020 and an EPS CAGR of 35% over the subsequent nine years, albeit off a relatively low base.