Xero could be about to surge past MYOB in the cloud wars

Typhoon Lan off the east coast of the Philippines. Thunderstorms spiral towards the centre and the eye is obscured by high clouds. (Photo: NASA)
  • Morgan Stanley forecasts that cloud accountancy software player Xero will soon take the market lead.
  • And competitor MYOB’s market share will fall from more than 50% to about 30% over the three years.
  • One reason is that Xero invests 35% to 40% of its sales in research and development.

Cloud accountancy software player Xero is expected to emerge the winner against older competitor MYOB in Australia, according to analysis by Morgan Stanley.

Analysts at the investment bank forecast Xero’s ANZ market share to move from 45% of paying subscribers today to more than 60% by 2021, underpinning the company’s s above-industry 30% revenue growth over the next three years.

“We think XRO is most adapted to the future environment,” write the analysts in a note to clients.

“With a pure SaaS (software as a service) business and no legacy business to protect, it will be quick and nimble to capture the lead as the market shift occurs.”

Morgan Stanley forecast MYOB’s market share to fall from more than 50% to about 30% over the three years, resulting in revenue growing at a weaker 8%.

“MYO’s legacy business holds it back, resulting in an increasing divergence between the two stocks as time and technology progress,” write the analysts.

“XRO is also a global growth stock while MYO has no global growth aspirations. This further limits its options/expansion opportunities, in our view.”

Here’s where Xero sits in terms of sales growth against its competitors.

Xero, which started in New Zealand in 2007, has disrupted the Australian market against incumbents and has recently taken cloud leadership in the UK.

It has a first mover advantage in cloud, a proven track record at market disruption, and high research and development investment that supports product leadership.

The company invests 35% to 40% of its sales, between $140 million and $180 million a year, in research and development while MYOB invests 16%, or $70 million to $80 million, and competitor Reckon at 19% or $17 million.

“MYO’s legacy issues impede its ability to respond and consequently hamper its growth,” write the analysts.

“It’s still a good business, it’s just that it’s not a pure play on this theme and thus we prefer XRO which can invest 100% of its R&D into capturing the SaaS opportunity.”

MYOB last month dropped a $180 million deal to buy a key part of competitor Reckon and is instead looking at a share buyback, greater investment in its platform and more sales and marketing resources.

The competition regulator, the ACCC, has competition concerns with MYOB’s proposed acquisition of Reckon’s Accountants Group because it could mean MYOB becoming the only supplier of practice software suitable for medium to large accounting firms.

MYOB now intends to invest more in the business rather than in acquisitions. This includes $50 million of research and development spend over the next two years to bring forward the delivery of MYOB’s online platform.

The company’s latest half year results showed revenue up 14% to $204 million and after tax profit rising 13% to $28.3 million.

Last month Xero announced a 38% rise in operating revenue to $NZ407 million ($378 million) in its annual results.

Xero’s share price is up more than 4000% since listing in 2007.

Morgan Stanley believes there’s still 22% upside and has a $50 price target. Xero is trading at $43.61 today, up 3.1%.

For MYOB, Morgan Stanley is Underweight with a price target of $2.80 a share. MYOB is sitting at $2.80 today.

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