The billion-dollar question for Xero Limited (ASX: XRO) is this – can it succeed in the United States? The market has certainly priced some US success into the share price.
As an accountant, I have used both Xero and its main competitor in the US – Intuit Inc. The US company's QuickBooks is a similar cloud-based accounting software with an immense presence and subscriber base.
I thought it would be worth looking at Xero's competition in the US to determine if investors have been overly optimistic on Xero's ability to materially penetrate in the USA.
Have a look at this table I prepared for both companies
| Intuit | Xero Limited | |
| Subscribers 2017 US | ~ 1.89 million | 92,000 |
| Subscribers 2018 US | ~ 2.6 million | 132,000 |
| Increase YOY | 38% | 43% |
| Total online subscribers worldwide | ~ 3.4 million | ~ 1.39 million |
| EPS | ~ US$4.64 | ~ $0.18 |
| Share Price | US$224.72 | $46.86 |
| PE | ~ 48.43 | ~ 260 |
| Revenue 2018 | ~USD 6 billion | ~ $407 million |
| Revenue growth | 15% | 38% |
| Market Cap. | ~ USD $58 billion | ~ $ 6.73 billion |
| Market Cap. / Revenue | 9.67 | 15.53 |
Xero has done incredibly well in the ANZ market, where it has about 583,000 subscribers and experienced 35% year on year (YOY) growth. This is largely due, I think, to MYOB Group Ltd. (ASX: MYO) meekly surrendering its early leadership position and sticking with an odd hybrid mix of cloud and installation software.
Having used QuickBooks online I certainly don't think it is a touch on Xero. However, it is cloud-based user-friendly software – something MYOB is not.
Also, Intuit is a much bigger company than MYOB and will not surrender its lead easily. It has the financial resources and the customer base to fight a major battle with Xero.
There are already signs the US market is going to be difficult for Xero.
In July this year, the company decided that payroll in the US was proving more difficult than first thought, and a partnership with Gusto was announced and all Xero US customers are now being transitioned to Gusto's payroll platform.
Another concern is the complex state taxes in the US which vary markedly between state agencies that all levy their own sales tax. This makes it more difficult to market a generic accounting software such as in Australia.
It also means that customers are probably more likely to stick to their existing software unless there are compelling reasons for a change.
What the above table shows is that Intuit's online software is also finding favour in the US and significantly growing market share by about 38% from 2017 to total subscribers of around 2.6 million. A long way ahead of Xero's subscribers in the US of 132,000 at 31 March 2018.
Of final note is the relative valuation of the two businesses. Xero is priced at around 15 times revenue, whilst Intuit is priced closer to 10. This means there will be a lot of focus on Xero's offshore growth figures over the next 12 months and any stumbling will likely result in the share price taking a hit.
Foolish takeaway
Xero has a compelling narrative and a great product. As do Afterpay Touch Group Ltd (ASX: APT) and WiseTech Global Ltd (ASX: WTC). I think particularly in Australia we want to believe these home-born companies can conquer the world. But as an investor it's vital to put the hard-hat on and critically examine what the stumbling blocks could be to the growth stories.
