Should you buy into the MYOB Group Ltd IPO in May?

MYOB Group Ltd will hit the market with a bang, but is XERO FPO NZ (ASX:XRO) the better investment?

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Accounting software group MYOB Group Ltd is set to float its shares on the ASX on 4 May at a price between $3 and $4 in what will surely be Australia's biggest initial public offering (IPO) of 2015.

Although the wide indicative price range provides prospective investors with little certainty on how much they will actually end up paying per share, many will still see the float as fair.

One of the advantages enjoyed by MYOB is that it has a proven track record and is already profitable. Indeed, the prospectus provided a case for strong profit growth, forecasting NPATA to jump 21% to $90.7 million in FY16, up from a forecast $74.8 million in FY15. Strong recurring revenue rates (94% in FY14) bode well for those estimates.

As such, many investors will be happy to subscribe to the IPO, no matter what price within that indicative range they end up being charged.

By comparison, MYOB's hottest competitor XERO FPO NZ (ASX: XRO) ("Xero") is yet to hit profitability and already commands a market capitalisation of $3.2 billion with its shares priced at $23.85 – down from an all-time high of nearly $43 achieved early last year. With that sort of valuation, it is clear that the market is expecting big things from the company in the future.

Tough Competition

MYOB is sure to generate a high level of excitement in the market in the lead-up to its IPO, just as Medibank Private Ltd (ASX: MPL) did in November. There is little doubt that some investors will find Xero's valuation somewhat off-putting, and may choose to invest in the proven business that is MYOB instead to gain exposure to Australia's tech sector.

Although the market can be silly at times, it certainly isn't stupid. There is a good reason that Xero commands such a high premium already, even though it is yet to recognise a positive figure on the bottom line of its income statement.

Xero is a pure cloud-accounting software provider while MYOB has traditionally provided desktop solutions to its customers. While MYOB's expansion into cloud solutions could certainly help the company generate significant profit growth, there are signs that suggest Xero is still the better investment opportunity.

As highlighted by Business Insider, IG Markets says that investors may have to wait until FY17 to see Xero report its maiden profit. Until then, the company will continue to pump funds into its own growth to gain a truly dominant share in the global market. It appears to have already won the New Zealand market (where the company is based), while it is also growing in Australia, the UK and the US.

Matt Joass, a research analyst for our premium Motley Fool Pro service, recently showed that Xero had eclipsed MYOB, as well as other rivals such as QuickBooks and Reckon Limited (ASX: RKN) in Google searches (indicating user popularity). That trend was not limited to Australia or New Zealand searches, but was also achieved globally.

Which stock should you buy?

When comparing two companies, investors can sometimes forget that more than one business can thrive in an industry. MYOB has a proven track record and could certainly continue to grow strongly – particularly if its non-paying desktop users continue to switch over to its cloud-based services, which will charge ongoing fees. This could also lead to reasonable returns for shareholders.

Although MYOB has the proven track record; Xero is flexing its muscles and could eclipse it in terms of growth over the coming years. While it might trade on a high premium which may make some investors uncomfortable, it's still a reasonable investment opportunity given its remarkable growth prospects.

Of course, investors should limit their exposure and ensure that they maintain a well-diversified portfolio, but to me Xero appears to be the better option. I already own shares in Xero (see my disclosure below), and it is unlikely that I will be taking part in the MYOB IPO.

Ryan Newman owns shares in Xero. The Motley Fool owns shares of Xero. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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