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Up 31% in 2017: Is it too late to buy XERO FPO NZX shares?

With the XERO FPO NZX (ASX: XRO) share price up 31% in 2017, is it too late to buy in.

Xero share price

XRO share price

Source: Google Finance

As can be seen above, Xero shares have been higher in the past. Much higher.

Nonetheless, the last 12 months of 41% share price gains have been very reassuring.

To Xero and back again

When Xero was sold down from over $40 per share to a lonely $12 in 2015, nearly every investor was pointing to its lack of profits. Indeed, Xero is yet to make a profit.

Yet, its share price is up 31% this year.

Why?

Perhaps it’s got something to do with the extraordinary success of its marketing and sales, or its great software.

More than that, however, I think it has something to do with people beginning to realise that Xero has ultra-long-term potential.

Xero’s cloud accounting software welcomed more than 500,000 new subscribers in two years, with more than 1.03 million now using the software.

Source: Xero Annual Report

That’s despite Xero’s software being notably more expensive than its peers.

How are they a success?

Although this comparison has its limits, I want to draw some parallels between Xero and Apple Inc. Specifically, to its marketing and brand.

What Apple does so successfully is harness the power of its brand. It’s not just any device, it’s the device. Whether it is an iPhone, iPad, iMac or headphones. You want it, you gotta pay up.

And it’s a one-way street. Once you go Apple, you don’t go back.

This doesn’t just happen, it is carefully crafted marketing which instils a sense of endearment in the consumer. They don’t care if the Samsung has five times the pixels or a waterproof exterior. Apples are Apples.

That’s the kind of legacy Xero CEO Rod Drury wants to pass on to his subscribers. It’s more than just accounting. It’s the comic books for accountants, small business and bookkeepers — ‘Xerocon’, they call it.

So, by all means, you can pay a lower price for software from Myob Group Ltd (ASX: MYO), but you won’t have your client on Xero. And you’re not going to Xerocon.

The proof is in the pudding. Look again at the chart above, Xero’s user base has almost doubled in two years.

Still, it’s not profitable.

Foolish Takeaway

Xero is a medium to higher risk business in my opinion.

What most financial analysts miss is the long-term nature of Xero’s business. It has 1.035 million subscribers now, but they’re not going to stop at that. And small businesses are not going to stop using the best accounting software on the market anytime soon.

So if you can handle volatility — that means, BIG share price rises and falls — and are prepared to hold shares for five years or more, Xero is a buy in my book.

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Motley Fool Contributor Owen Raszkiewicz owns shares of Apple. Owen welcomes and encourages your feedback. You can follow him on Twitter @OwenRask.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Apple. The Motley Fool Australia owns shares of Xero. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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