An interesting article for you all to muse over on this...

An interesting article for you all to muse over on this wonderful Saturday morning.
Just saying xro sp did go to $40 about 18 months after this article was written.
Have a great weekend all and looking forward to the action next week
Is Xero worth a cool half billion?
Chris Keall Saturday June 30, 2012
http://www.nbr.co.nz/article/xero-worth-427m-analysts-have-sharp-message-ck-120198

The below was first published on June 1, when Xero had a market value of $427 million.

Yesterday - Friday June 29 - the company closed at $5 for the first time, giving it a market cap of a cool half billion (or $520.5 million to be precise, according to S&P Capital IQ). Xero gained extra momentum from its elevation to the NZX50 earlier this month (Rakon - once a tech darling, too - was deleted from the index).In light of that milestone it's worth revisiting the debate: is Xero over-valued? (With a couple of figures updated for Friday's close.)

Xero full year result (12 months to March 31, 2012)

Profit: -$7.9  million (+5%)
Revenue: $19.3 million (+104%)
Customers: 78,000 (+116%)
Operating expenses: $28.4 millon (+58%)
Cash: $39 million
Cash burn/year: $12.7
Rod Drury is a smart guy.
And Xero is a clever company, with a great product.
But is it $520.5 million worth of great?

That’s the online accounting software company’s market value as of close of business yesterday (by S&P Capital IQ’s count, with Xero shares [NZX:XRO] closing at $5.00 on Friday).

I’m not sure why there’s only one brokerage following Xero (cue commentors feverishly hitting their keyboards), because it’s a fascinating company, with a lot of money at stake and lot interest from the public.

Still, that is the case: Forsyth Barr analysts Andrew Harvey-Green and Fraser Hunt appear to be on their lonesome (by Mr Harvey-Green’s estimate, a quick NBR survey of major analysts, and S&P’s coverage data.)
In February, the pair nudged their valuation of Xero from $2.60 to $2.63. They now calculate it’s worth $3.16 (or a market cap of $328 million).

ForsythBarr recommends people off-load shares.
The stock is rated high risk and on May 25 the broker re-iterated its warning to clients: “While we believe Xero has positioned itself well for success, it is still early days and we believe the market is already factoring in a high chance of success and overlooking the downside risks.”

ForsythBarr maintained its REDUCE rating on Xero following the company’s full-year result reported last week (which saw revenue more than double to $19.3 million for  12 months ended March 31, but losses increase 5% to $7.9 million; see table top of story.)

By any standard investing metric, you have to agree with Forsyth Barr.

However, at least one high-profile supporter (who didn’t want to go on record at this point) was keeping the faith, after carefully digesting  Xero’s annual report.
But was he comfortable keeping half a billion dollars’ worth of faith in a company with $19.23 million revenue, which now refuses to say when it will turn a profit?
How could he believe it’s worth more than $426 million?

“Easy,” he replied.

“ This is a long term, global play. They have a good chance of hitting 10 times that.”
For me, it’s a great unknown: can Xero parlay its early entry into the cloud category into world domination? It does take off in the US and other markets, then it could spread like wildfire. And its cloud model means there’s very little incremental cost adding customers to its system.