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Why I bought XERO FPO NZ shares last week

If you’re a growth-oriented investor with a seriously long-term (5 to 10 year) focus I’m sorry to report that the local stock exchange is pretty limited in its investment opportunities.

But of course if you can identify and buy tomorrow’s blue-chip shares you are likely to enjoy some spectacular investing returns.

Almost a year ago to the day I wrote this article asking: Is Xero a blue chip share of tomorrow?

At the time XERO FPO NZ (ASX: XRO) shares changed hands for $16.25 as investors worried about its growing losses, balance sheet and the group’s progress in the U.S. market.

A year later though and the stock closed at $22.60 today to offer a 38% return over the year and more importantly a strengthening outlook in my opinion.

That’s why I was happy to add to my small holding last week at a price of $21.56, with Xero turning operating cash flow positive for the six-month period ending March 31 2017.

However, it’s worth noting the Xero is still investing heavily for growth with operating and investing cash outflows totaling $25 million for the half, with $113 million cash in hand remaining on the balance sheet.

Given the growth rates, rising margins and capital compounding nature of this business I now have great confidence that Xero’s management team will deliver on its pledge to “manage the business to cash flow break even within its current cash balance”.

While moving to meet this key objective Xero will be also able to continue to invest heavily for growth, with markets such as the United Kingdom and Australia still holding plenty of potential.

More generally this business should appeal to long-term focused investors because the shift from desktop (or Microsoft Excel based) accounting to cloud-based accounting is still in its early stages around the world.

This is not rocket science and means Xero could potentially grow at strong rates for 5 to 10 years yet, with the company’s goal in generating $1 billion in annual revenue realistic in my opinion.

If it delivers on this goal its high gross profit margins mean it could be delivering eye-wateringly large blue-chip style profits, while trading on many multiples of those profits as a sexy tech blue chip likely with a NASDAQ listing. In this scenario I expect the share price could be multiples of where it is today.

Of course nothing is guaranteed in investing and as a loss maker in a competitive area Xero remains a high-risk play and I would not suggest allocating more than a small part of your investable funds into this business. At today’s price of $22.60 I still rate the stock as a buy and will be keen to revisit how it has progressed in one year’s time.

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Motley Fool contributor Tom Richardson owns shares of Xero. The Motley Fool Australia owns shares of Xero.

You can find Tom on Twitter @tommyr345

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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