We found the contrast between the Xero and Rakon results yesterday fascinating.  While obviously very different companies in that one manufacturers a product that is sold into the tech industry (Rakon) and the other has created an online accounting system that is growing rapidly.  However, both are considered ‘tech companies’. 

There were also some similarities in both results with Xero growing customers by 101% during FY13, while Rakon grew smart wireless device (SWD) volumes by 85% and now supplies five of the top seven Tier 1 global smartphone brands.  The Rakon loss for the year was $32.8m and Xero’s loss was $14.4m, so on the face of it there are not too many differences, or are there? 

So why is one valued at $1.62 bn with a $13.84 share price and $78 million cash on the balance sheet (Xero) and the other valued at $40.1 million, with a $0.21 share price and $36.1 million of debt on its balance sheet (Rakon)? 

One could easily point out the demise of the Rakon share price, which peaked at $5.50 in 2007, as a salutary warning for those current investors in Xero.  We are more balanced.  Rakon has suffered from investing heavily in new capacity and chasing a large and fast growing market, which only serves a few key customers, that is open to fierce competitor price activity.  The result has seen price and gross margin declines causing operating losses.  A path out of Rakon’s predicament is not obvious, although its net tangible assets will give it some support. 

Xero, on the other hand, is in the sweet spot of growth companies.  Growth is from a low base and new markets are beginning to open.  The company has hardly put a foot wrong and is riding the crest of the wave of Software as a Service (SaaS) company valuations.  Are we dreaming to think that this company could ever make money?  Should investors run as they have from Rakon?  We would suggest looking at how profitable both Trade Me and Diligent (and Google and Apple) have become to see just how much money a tech company can make once it has scale for its model and can maintain or dictate pricing. 

Brooke Bone

Senior Analyst