The lustre of sharemarket darling Xero is waning, with its stock down more than 30% on a year ago and its share price down almost 10% since Friday's delivery of its full-year result.
Brokers at Craigs Investment Partners have maintained a ''sell'' recommendation on the stock, with Forsyth Barr similarly leaving its rating unchanged, at ''underperform''.
Cash in hand and cash burn are of paramount concern to investors for the next 18 to 24 months.
It has been hugely successful in New Zealand with its cloud accounting system.
Now analysts are increasingly scrutinising its penetration rates into the UK, Australia and US, the latter being its most crucial target market.
While investors have relied on capital gains from Xero as a growth tech stock, with expectations of a high cash burn rate in ploughing tens of millions of dollars into expansion, their patience may be waning, although Xero has a cash war chest of nearly $270 million at hand.
Xero's shares are down 31%, or $9.40, on a year ago, which includes having dropped about 10% in recent days to trade down to $20.66 yesterday, following last Friday's full-year disclosure.
Although it was positive in actual growth figures, while revenue gained 77% to $123.9 million for the year, its eighth consecutive annual loss had almost doubled from the previous year to $69.5million. Meanwhile, costs were $19 million to $20 million higher than analysts' expectations.
Craigs Investment Partners broker Peter McIntyre said while Xero delivered another period of ''exceptional sales growth'', it was again driven by its home markets of New Zealand and Australia, accounting for two-thirds of all growth.
''These are, however, finite markets and for investors to earn acceptable returns from here, Xero will need to replicate its success in the UK and the US,'' Mr McIntyre said.
He ''remained optimistic'' about the UK, but the fundamental reservation was that at $20.85, the market was pricing Xero's US business at an estimated $NZ900 million.
''We believe this is too aggressive at this early stage,'' he said. Craigs was maintaining its ''sell'' recommendation, while its 12-month price target rose 4.2%, to $16.98.
Forsyth Barr broker Andrew Rooney, while describing Xero's penetration into Australia, the UK and the US as ''still early days'', outlined several difficulties facing the company through 2016 and into 2017.
''Despite strong customer growth in Australia and the UK, it is still early days for these markets and Xero's cash burn will continue to grow in full-year 2016,'' which prompted retention of Forsyth Barr's ''underperform'' rating, Mr Rooney said.
Mr McIntyre said Xero finished the year with 475,000 subscribers, slightly up on Craigs' expectations, with New Zealand and Australian growth ''continuing to impress''.
However, UK growth by 33,000 to 83,000 was ''disappointing'', while the US grew beyond Craigs' expectations to 83,000 subscribers, with its customer retention rate up from 54% a year earlier to 69%, he noted.
''While encouraging, Xero will need retention to improve further to around 80% in order to build a sustainable and profitable business in the US,'' Mr McIntyre said.
Mr Rooney said 68% of Xero's subscriber growth during full year 2015, or 130,000 of its total 190,000 subscriber growth, was from Australia and the UK.
Xero estimated its market share in Australia was 10%, and 2% in the UK, Mr Rooney said.
''This highlights just how early-stage it is in these countries,'' he said.
With alternate cloud accounting services on offer from incumbents and other competitors, it would be difficult for Xero to replicate its New Zealand success overseas, he said.
While Xero subscriber numbers of 35,000 in the US were ahead of Forsyth Barr's estimate of 31,400, Mr Rooney said that only served to highlight the small market share Xero had obtained in the US, where
an estimated 29 million small to medium-sized businesses operate.
''The full year 2016 was about developing partnerships and enhancing the product ... prerequisites for driving market growth, which we do not expect to see before mid-full year 2017,'' Mr Rooney said.
He noted US competitor Intuit posted a quarterly increase in subscribers of more than 102,000, boosting total subscriber numbers to 841,000.
''Costs at $204 million [for Xero's year to March] were the negative surprise, being $19 million worse than forecast and contributing to a $88 million cash burn for the year,'' Mr Rooney said.
Mr Rooney predicted development costs would increase, along with US and UK expansion, which would ''lead to a higher cash burn rate'' during full year 2016.
Xero's ''customer acquisition costs'' had grown being an average of 11.8 months revenue in 2014 to 13.5 months for 2015, he said.
