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Xero Ltd (XRO) $134.52

On their strategy day, XRO’s primary message was that it aims to double revenue while still achieving the rule of 40. The company didn’t provide a timeframe for the revenue lift, but 3-4 years looks realistic. The market embraced the mantra that profitability would not come at the expense of the topline, with several major houses upgrading their already positive outlook for the stock. A strong, refreshed management team has enhanced our confidence that they can deliver on this ambitious target to double sales while continuing to grow.

NB: The Rule of Forty is a high-level success indicator for software companies. It considers that the combination of growth rate and profit margin should be more than 40%.

The company has a logical plan to address latent opportunities, starting with the obvious low-hanging fruit. However, the success of its efforts to expand into the US and UK, where cloud accounting penetration remains low, is key to achieving its objectives, a potential concern to some investors, but at MM, we feel there is significant scope to expand sales in a market which is large enough for several players, e.g. Intuit’s QuickBooks in the US and Sage in the UK. Moving forward, XRO’s ability to grow subscribers and earnings will be scrutinised carefully but for now the markets on board. From an earnings perspective, the company also enjoys significant pricing power given its relatively low cost, with the market already having absorbed meaningful increases last year.

Considering the global opportunity moving forward and high-quality recurring revenue streams, we believe XRO’s valuation isn’t as daunting as today’s lofty PE suggests. Relative to its local peers, its growth-adjusted multiple is actually attractive. Lastly, it would be remiss of us to write about a tech stock without mentioning AI; XRO has the potential to improve both its product offering and efficiencies, reducing costs and hence adding to the important bottom line.

  • We can see XRO testing $150 over the coming months, assuming the global Tech Sector remains firm – MM is long XRO in our Active Growth Portfolio.
XRO
MM is long and bullish XRO
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Xero Ltd (XRO)
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