The Xero Limited (ASX: XRO) share price hit another new all-time high this week, pole vaulting over $115 a share to close at $117.86 on Wednesday. Even though Xero shares cooled off yesterday and closed for $115.50, it’s an incredible run up for this online accounting software company. Remember, Xero was going for under $80 a share just 6 months ago.
Xero’s current share price is not cheap by any metric you use. At $115.50, Xero has a price-to-earnings (P/E) ratio of more than 5,000.
Now, if Xero continues to grow at its current clip, this laughably high P/E ratio might be justifiable for some investors. Xero did manage to post earnings growth of 88% for FY20, as well as revenue growth of 30% and free cash flow growth of 388%.
But perhaps investors are getting a bit carried away…
Hero to Xero?
The market is arguably acting like Xero has an unlimited growth runway and a monopolistic presence in its market. But this isn’t the case. Xero has a competitor and it’s a gorilla. Intuit Inc (NASDAQ: INTU) is an American company that also offers cloud-based accounting software – its QuickBooks program. Xero currently has a market capitalisation of $16.55 billion. But Intuit is valued at US$90.4 billion. This isn’t a company to be trifled with.
According to reporting in the Australian Financial Review (AFR), Intuit is the number 3 player in Australia, behind Xero and MYOB. But Intuit also has a global customer base of 5.1 million across 200 countries.
Additionally, the AFR also reports that the Australian Competition and Consumer Commission (ACCC) has authorised Intuit to participate in open banking. Open banking is part of a key government competition policy that, according to the AFR, “allows consumers to direct data held by banks – and soon energy companies – to be securely transferred to accredited third parties, who can use it to offer lower-cost services.”
So it’s clear that Intuit isn’t entirely happy with its bronze medal in the Australian market – and that should have Xero worried. If Intuit can tap this avenue effectively, it could steal some market share away from Xero. I’m not suggesting Xero is in trouble. But it is possible that the current Xero share price isn’t reflecting the true nature of the accounting software landscape. The company has fierce competitors. Think about that when you’re looking at P/E of more than 5,000.
Don’t get me wrong, Xero is a fantastic company. However, I do think its possible that the market is pricing it to perfection right now. As such, I’m not too interested in the current Xero share price. But I’ll keep my eye on it nonetheless.
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Returns as of 6th October 2020
Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Intuit. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Xero. The Motley Fool Australia has no position in any of the stocks mentioned. 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 Scott Phillips.
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