Xero: Normalizing Business Failure Rates Expected to Consume Xero’s Sales and Marketing Budget

We maintain our AUD 75 per share fair value estimate for narrow-moat-rated Xero as we approach the release of its half-year results on Nov. 9. At current prices, Xero shares screen as materially overvalued. We believe a normalizing business environment will result in Xero having to spend an increasingly large share of its sales and marketing budget to replace churned customers, which leaves increasingly less budget to fuel subscriber and revenue growth.