Oops! A bucketful of apologies…
After getting over my cold, and having a break from all the numbers, I revisited the spreadsheet on Xero just to check it. Something didn’t add up. Once I looked, it was pretty easy to spot what I had messed up. The ol’ terminal value calculation, a beginners mistake. I blame the snot jamming up my keyboard.
The terminal value calculation basically adds the bulk of the value to the company, because it factors in all the cash flows after the company hits profitability. Its a big number, but I originally had it calculated as EBIT(1-t)(1-reinvestment)…
Doh! Which is actually just the free cash flow figure for the last year… oops. Sorry about that. Note to self: don’t do valuations with a cold.
So there were 2 steps missing. 1. Work out the terminal value from that cash flow figure, and 2. Discount that terminal value back to present value, and add it into the cash flows to get the firm value.
Which means, long story short, that there is a big number missing from the valuation.
Since I’m in revision mode, lets ‘improve’ some of the other figures. Firstly, lets cut down the Operating Margin to more realistic 15%, putting it in line with the best of the current SaaS firms. And lets boost the Sales/Capital ratio, maxing it out to around 4, hopefully reflecting that SaaS firms have lower capital requirements.
The end result of these changes is an addition of another $200,000,000 to the value of the firm, which gives a per-share value of $3.55. Sorry!
This is a very sunny-side valuation,so everything going pretty much perfectly for Xero. But whats in a couple of hundred million? The things to really focus on with Xero are: Growth rate in revenues (ie, customers and revenue-per-customer) and operating margins. If customer numbers don’t grow as predicted, for example if customers are only half of predicted, then the today stock price comes down to the $1.20 level. If operating margins drop (ie, expenses involved in moving to new markets are higher than estimated), value similarly drops accordingly. And alternately, if they go up, the stock price should increase. Roll on next earnings report!
In summary, note to self: be careful when doing these things! This is my first public valuation, so it was bound to go wrong. Learning from mistakes is always a plan… Apologies again! I will be tracking Xero on my spreadsheet as new news comes out, which I’m pretty excited about! heres the link to the spreadsheet.