Stock in Focus: Xero (XRO.ASX)
Xero shares jumped +10.7% after its newly appointed CEO revealed plans to cut its workforce by 700-800 roles, representing upwards of ~16% of its 4,915 full time equivalent employees.
Management expects this action to reduce its operating expense to revenue ratio to approximately 75% in 2024, down from 83.8% currently. This will be the start of a more efficient and profitable growth profile for the business, while revenue growth should be unaffected as the jobs are predominately from non-revenue generating areas.
We rate Xero as a quality tech company, with plenty of growth potential over the medium to long term, albeit with some slow-down in growth levels over the near-term. We remain High Risk BUY rated on Xero we still warn investors to still be cautious over the next 6 to 12 months, as the recent volatility will likely to continue over the interim.
New Zealand Market Movers
The New Zealand market (NZX50, -0.2%) on another lackluster day of trade and newsflow.
Australia Market Movers
The Australian Market (ASX200, +0.1%) was mostly flat on a mixed day of trade.
Tech stocks were up strongly led by Xero, with other tech names also performing well, while these gains were offset by losses across Healthcare and Materials.
Myers shares jumped +18.3% after delivering a 4 cents per share dividend and 4 cent per share special dividend, as half year revenues jumped +28% from the previous year while net profit more than doubled to $65m. Myers has been the subject of takeover rumors – the billionaire Solomon Lew owns a big stake – we don’t have a view here other than prefering to avoid retail given economic conditions at present.
US Market Movers
The S&P 500 fell -1.85% as jobless claims remained around the ~200,000 mark. Powell’s under a lot of pressure here to do more — both his testimony at Congress and the latest hard data is indicative that 25 bps hikes aren’t enough. Note the major fallers in the market today – lots of small regional banks – East West Bancorp down ~8%, First Republic Bank down ~12% – is this a warning sign? The big banks (JP Morgan is our preference) tend to do fine: unlike the GFC they have ample capital reserves this time; smaller banks on the other hand tend to be affected disproportionately. Other assets that fell today are those bubble-like risk assets – the ride-hailing company Lyft (down ~8.90%) and the dating app Bumble (down ~7.00%). Again this highlights the risk in buying cash-burning companies in a 5.50-6.00% terminal interest rate enviroment.
Is there anything to be found in the rubble of today’s market? Perhaps DaVita (DVA)- the US kidney dialysis leader that Warren Buffett owns a significant stake in. Fell ~5.68% today and trading at 13x earnings — it’s fallen from 52 week highs of ~$124 and now trades at 2019 levels — looks a little oversold and a chance to pick up some quality healthcare for a reasonable price. The company has a 37% market share in the lucrative US dialysis market. Suggest a high risk buy here for the bold.
| DaVita – high quality compounder – 11% EPS growth over 16 years | Value |
|---|---|
| EPS in 2022 | $5.33 |
| CAGR from 2007 to 2022 | 11.03% |