In May, XRO posted a solid FY24 result, as they balance the challenges of growth and increasing earnings. They had previously flagged their focus on achieving what’s called the Rule of 40, which says the sum of annual revenue growth and the free cash flow margin should be above 40, and at this recent result they achieved it. Software-as-a-service business often use this as a guiding principle to get the balance right, and XRO is now hitting the mark.
It’s very expensive and time consuming for a company like Xero to capture a huge user base which currently sits at over $4m, and now they are ratcheting up pricing which drives increased average revenue per user (ARPU). We love the business, but at some point in the 2H, high-valuation stocks will fall out of favour, and XRO will likely experience some profit-taking. Perhaps better than through 2021/2, but it’s likely to weigh on performance.
- We hold a meaningful 5% position in XRO, up ~33% from initial purchase. We will consider trimming this above $140.
MM is long and bullish XRO
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