Shares of Japanese startup surge 300% on demand for cloud-based accounting

[TOKYO] Daisuke Sasaki has seen his cloud-based accounting company's valuation swell to US$3.7 billion despite having yet to show a profit, but he's not letting that pressure him.

Shares of Freee KK have quadrupled since going public on the Tokyo Stock Exchange in December, along with rising demand for cloud services amid the remote-working trend. The stock rose as much as 1.6 per cent Monday to a new high.

"We don't have a set timeframe for when the company will swing to profits," Mr Sasaki, founder and chief executive of Freee, said in an interview on Aug 17. "Our business is about subscription." The Tokyo-based firm's stock is one of the many technology names that have surged during Covid-19, fuelled by investor euphoria over stay-at-home and DIY themes. While the pandemic roiled the outlook for companies around the world, US accounting software giant Intuit beat recent earnings estimates, helped by better-than-expected growth for its cloud-based service for small businesses.

Freee has the top shares of the Japanese cloud accounting and human-resources software markets, according to an August report from Daiwa Securities, with competitors including Money Forward. Subscriptions to Freee's flagship accounting service stand at over 220,000, having grown at more than 50 per cent annually over the past five years. Its sales surged 53 per cent in the year ended June 30.

Acquiring new users takes priority over near-term earnings, said Mr Sasaki. He estimates that Japan has a total of about six million small to medium-sized enterprises, with only 15 per cent of them currently using cloud-based accounting. Freee's goal is to outpace market growth to be the dominant player.

"We're still extremely small in terms of where we could be," Mr Sasaki said, whose resume includes stints in marketing at Google and as an analyst at CLSA.

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Market expert views on Freee are mixed, with just two buy recommendations among the six analysts that cover the stock. Masato Araki, an analyst at Mitsubishi UFJ Morgan Stanley Securities, cut his rating on the company to underweight on Aug 26. While Freee has the potential for strong sales growth longer term, the coronavirus outbreak will likely be a "short-term drag" on its marketing efforts by making it harder to conduct face-to-face meetings, the analyst said.

In contrast, Mr Sasaki sees the pandemic as an opportunity to help accelerate the shift toward digitalisation of office tasks.

"It's possible for this trend to be ignited, accelerating the adoption of cloud-accounting software even further," he said. "Our business is really just getting started."

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