Accounting software provider Myob Group Ltd (ASX: MYO) hasn't enjoyed the smoothest run since it made its long-awaited return to the ASX early last month, with the stock having been stuck in a downward spiral ever since.
After having made its debut at $3.91 – the upper end of its indicative price range of $3 to $4 per share – the stock has retreated 11% to trade at $3.48. It hit a low of $3.39 on Friday last week.
But there is light at the end of the tunnel – at least according to Macquarie which initiated coverage on the stock with a "neutral" call and a $3.73 price target. As highlighted by the Fairfax press, Macquarie based its recommendation on the brand's market share, desktop base (more on that below), as well as its ability to capitalise on strong relationships. But it also recognised the competition risk facing the business.
The New Zealand-based XERO FPO NZ (ASX: XRO) ("Xero"), which is a pure cloud-based accounting software provider, is widely considered to be one of the greatest threats to MYOB's dominance moving forward. While it mightn't have been around for as long, the company is investing heavily in research and development while its excellent customer service and user-friendly interface are quickly winning it fans all around the world.
In fact, it announced in March that it had reached a massive 200,000 paying Australian customers – up from just 109,000 a year earlier. Meanwhile, it has become the dominant player in its home country and is making progress with its expansion into the US and the UK.
When MYOB was preparing for its float, it marketed its ability to continue expanding around the idea that it could convert a number of its desktop users (who do not pay ongoing fees) into paying users of its cloud-based services. Indeed, a number of these customers will switch services, but others are also likely to part ways with the business in favour of other providers, such as Xero or Reckon Limited (ASX: RKN).
As such, it is imperative that MYOB continues to invest in research and development to retain and grow its customer base which, along with the competition it is facing, could certainly impact its earnings potential. Whether the stock can reach Macquarie's price target remains to be seen, but investors should still approach the stock with caution.
If you like investing in tech stocks, you'll LOVE this
