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Xero: Possible Near-Term Drop Is An Opportunity

May 03, 2020 4:30 PM ETXero Limited (XROLF)3 Comments
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Tech and Growth


  • Xero is a highly attractive growth story. The company has great products, a global presence, and a strong corporate culture. It consistently posts 20%-50% growth across all of its markets.
  • The stock has been up ~40% in the last twelve months as growth and profitability were strong as of H1 2020.
  • Strong enhancements around the products also drove cash flow growth. FCF turned positive in H1 as the company generated $4.8 million of FCF.
  • The stock already recovered from a ~34% drop from its TTM-high during the COVID-19 selloff in March.
  • Given the ongoing impact still seen on SMEs in all markets, there is another near-term opportunity ahead.


Xero [ASX: XRO] / (OTCPK:XROLF) is a New Zealand-based company building a cloud accounting software for SMEs. Given its easy-to-use product, global presence, and strong company culture, we have always liked the business. As of today, the fundamentals have been strong and the stock still presents a solid investment opportunity. Over the years, the share price has steadily appreciated. However, the COVID-19 outbreak that has been impacting many SMEs globally will likely create pressure on the stock in the near-term. We are yet to find out the overall impact on Xero's business as we look forward to the second-half earnings release (H2 2020) on May 14. Therefore, there is a possible near-term entry point opportunity in and around the earnings date to pick up the stock at a bargain.


Key metrics have always been strong. Based on the most recent half-year earnings report ending September 2019 (H1 2020), top-line and ARR (Annual Recurring Revenue) run rate growth exceeded ~30% while FCF (free cash flow) reached $4.8 million. Much of the increase in FCF was due to the 33% increase in receipts from customers and the slowing growth rate in expenditure.

(source: company’s H1 2020 report)

The steady improvement in FCF growth has also been in line with the solid ~20%-50% subscriber growth across all its markets. The company’s strong focus on the product seems to be paying off here, as the enhancements it made around the products drove the strong conversion in H1 2020. In North America where the revenue grew about ~34% YoY, the company partnered with a digital bank serving mostly SMEs, Novo Bank, to provide seamless integration between their users and Xero. The company also launched alternative lending products in South Africa while doing a similar integration with an SME bank, Hang Seng, in Hong Kong. Both regions fall

This article was written by

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Former tech operator, entrepreneur, and venture capitalist with over a decade of experience starting, investing, and building companies in Asia and US. Long-only manager seeking multi-asset technology / growth opportunities driving disruptive innovation globally.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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