Why Xero's plummeting share price is irrelevant


#1

It’s natural to think that Xero CEO, Rod Drury is concerned at the rise and fall of the Xero share price. But I suspect he isn’t, as the price isn’t anything to do with him, or funnily enough even with Xero.

Here is the reason why.

Xero listed on the stock market so it could raise money to fund the business. This is a great idea. You sell shares in the business, and Xero gets the cash. Other investors also bought shares and the cash is put into the Xero vaults. All good.

But, now the company is listed on the stock market, anyone can buy and sell the shares.

This process has nothing to do with Xero.

If you buy a share for $1, it means someone who has shares has to be willing to sell for $1. Shares traded on the open market are usually owned by the general public. The money received doesn’t go to Xero. It goes to you or me.

If more people want to buy them than have them, the price goes up.

You invest $1 and if the price goes to $20, you have made a great return. But you haven’t done anything except take the risk – and people are very irrational. Not to mention greedy.

When people hear of something that might mean the company is doing well (like well known overseas investors putting in large amounts of cash), everyone thinks ‘if they did it, they must know something, so I will invest as well.’ The price keeps going up, but Xero doesn’t necessarily win from it. Of course staff might have shares which they can sell – so personally they may do ok – but the company remains the same.

Xero as a company can’t stop or control this price rise on the open market.

It’s the same in reverse of course.

If more people want to sell them than want to buy, the price goes down. A rumour or piece of evidence in the media (always the best place to know what is going on, right?) could make people nervous about the future and then suddenly the price falls as more people want to sell.

Of course someone is still buying them (at a cheaper price).

In the meantime Xero the company is selling, inventing, building and growing their customer base oblivious to the price yo-yo. It doesn’t change anything inside the company. If the price went to 1cent and Xero still have cash in the bank and trading happily, then it’s irrelevant. Except for the people that bought them hoping to make a quick profit.

Xero by the numbers

The software developer is looking for a million customers and is furiously targeting growth in the US market where it sees the potential to take market share of an estimated 29 million business owners

Xero had a cash and short-term deposit balance of $170.8 million at Sept. 30 – down from more than $230 million a year earlier when it sold 9.92 million shares at $18.15 apiece.

Xero’s share price has stumbled more than two thirds from its record high of $45.99 in March, and touched a low of $15 last month. Meanwhile, the company doubled staff numbers to 758 in the 12 months ended March 31 and has continued to hire workers as it attempts to scale up to a profitable size.


#2

Agree. Share price doesn’t always reflect the value of a listed business, especially when you are working in the internet space. A normal business can be valued often as net assets plus goodwill, but once you list all bets go out the window, as it’s a mix of everything; net value, potential value, existing and future market share, competitor reactions and then mix it up with an irrational public with supply and demand.  That’s why no-one really knows what a stock will do (if they did they would be trillionaires).


#3

Xero listed on the stock market so it could raise money to fund the business. This is a great idea. You sell shares in the business, and Xero gets the cash. Other investors also bought shares and the cash is put into the Xero vaults. All good.

aliii