For Reckon's shareholders, the full release of its own proprietary online accounting software cannot happen quickly enough. Since mid-August, when it released its full-year results, its stock has fallen more than 16 per cent.
This February the training wheels come off for Reckon because its deal as distributor of QuickBooks, the online product of US giant Intuit, will come to an end. Reckon has about 40 per cent market share and it is generating good cash flow. There are question marks over whether this will continue to be the case.
"The market is saying, 'Do these guys know how to build a product?"' says Nick Harris, technology analyst with stockbroker RBS Morgans. "All [Reckon has] done before is repackage and develop a product that was developed in the US by Intuit, a billion-dollar company that spends hundreds of millions of dollars on R&D."
Reckon's share fall has to be viewed in context. At $2.13, its market cap is $274 million, a fraction of its competitors. MYOB was bought by private-equity company Bain & Co for $1.2 billion, while New Zealand-based Xero's shares have almost doubled in the past year, delivering it a market cap of $1,970 million. Technology One, which is in a similar space, albeit at the corporate end of the spectrum, has also had stellar performance. Its stock has risen almost 60 per cent in 12 months, giving it a market cap of $640 million.
The differing valuations could be used as the basis of a Harvard MBA case study, because the highest valued, Xero, isn't making money. This comes back to the importance for Reckon to establish its Reckon One online product, fast. If it can, it could be one of the big-value plays on the ASX, but if it can't it could lose its shareholders even more money.
Reckon is trading on a PE of 13 times, compared with its 10-year average of 16 times. Technology One has the same 10-year average, but is now on a PE of 21 times, while Xero has zero earnings.
Why the disparity in valuation? A big part of the answer lies up there in the "internet cloud". The "cloud" is lucrative because it means small and medium-size accountants don't have to spend thousands on servers and software. It's all owned and managed directly by companies such as Xero, which sells its services to clients.
Reckon is definitely at the crossroads. If its online product can prove its cloud credentials, shareholders are in for a profitable ride.
Richard Hemming edits the fortnightly newsletter Under the Radar Report: Small Caps.