The Xero share price has been rocketing up recently, making people a fair whack of paper money. Which is great, and why we invest in stocks right?
Well. Actually, not really. I know, the end goal is to make money. But I would submit that the “why” we invest is to actually own great companies at good valuations. Which end up making us lots of money, because they are great companies.
Why this definition? Well, many people in the stock market define winners as stocks where the price has gone up and up. As Xero has in recent months. Just like a rocketship after take off. So if you had bought at $0.75, and sold now at $2.68, you would have made a nice chunk of cash. But this is not how I invest (for better or worse!).
So Xero is a rocketship after take-off. My interest is whether Xero has enough gas to get out of orbit, and thats what is not clear to me now. I just can’t tell whether Xero is going to be a best-of-breed business, or a very successful company, or one of the also-rans in a highly competitive marketplace, or go bankrupt, or whether a big player will buy them out.
All of these scenarios are still on the table. My valuation of Xero portrays Xero as a ‘very successful’ company, with almost 2 million subscribers by 2018, and a ‘now’ shareprice around $3.75. Now, valuations can be wildly inaccurate, but they are a good ‘line-in-the-sand’ if you’re looking to work out whether a company will hit orbit. With the shareprice currently at $2.68… theres just not enough ‘up’ for me for all the risks still on the table.
So I’m watching Xero with interest. I suspect a buy-out might be the best outcome for Xero (and shareholders), but only time will tell.