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MM thoughts on XRO

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MM thoughts on XRO

“Hi Guys, I have recently cashed out Xero shares because their current share price and business model is unsustainable. They are hardly turning a profit let alone paying dividends to shareholders. I know that they have their reasons and are pushing for further growth but what is the delay? Why aren't small businesses using online software? How much further growth can they realistically expect? It appears that great hype comes with great expectation but the jury is still out on Xero. My investment philosophy has always been that the most valuable assets are income producing assets. We live in unprecedented times.” - Regards, Cade Z.

Answer

Hi Cade,

We do indeed live in unprecedented times and as such I believe as investors we all need to remain flexible, over the last few years its undoubtedly been the low / zero income producing assets that have outperformed. Quality new IT business grow exponentially by continually reinvesting before they pop out the other side as major cash generating machines, Apple (AAPL US) is clearly the extreme example and it still yields under 1% preferring to use its mountains of cash to perform massive stock buybacks.

Xero (XRO) is now a $20bn cloud based accounting business that’s seen its shares appreciate significantly over the last few years, every time I’ve considered taking a profit from our Growth Portfolios position its ultimately proven to be a bad idea, so far. As we’ve seen with CSL the best companies can become overvalued with the question being where is that level for XRO. They have a great easy to use product with an ongoing long runway for future growth hence for MM to consider being a seller, we would want to see a spike higher.

XRO
MM views Xero as a very good long term growth story
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