Why I just quadrupled my holdings in XERO FPO NZ

Accounting software company XERO FPO NZ (ASX:XRO) looks like great value at today's prices, and I've majorly increased my stake.

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The headline is not a typo; I've recently quadrupled the size of my holdings in New Zealand-based accounting software company XERO FPO NZ (ASX: XRO).

I must be pretty confident to make such a big increase to my stake, right? 

Or am I just exceptionally foolhardy?

Xero shares right now present as a compelling opportunity on a number of fronts and the recent pull-back in price presented an opportunity that was simply too good to pass up.

But what has Xero really got going for it?

Besides cracking growth and loads of blue sky potential, actually quite a lot. I'm not a fan of taking a big stake in any company unless 'all of the stars align', so to speak, but Xero ticks every box for me.

Here's what I like:

  • Blue sky potential

This is a must if you're going to buy an unprofitable business, and it's a quality Xero has in spades. While the New Zealand market appears to be approaching maturity, there is still ample opportunity to grow in Australia and Xero has barely made a dent in the UK or USA.

Xero revenues by region for 2015 (source: company report)
Xero revenues by region for 2015 (source: company report)

Simply replicating Australian customer numbers in the UK and the US would see a massive increase in sales…And the total market is 10x the size.

  • A competitive advantage

As first-mover into the cloud space, Xero has a substantial lead over competitors Myob Group Ltd (ASX: MYO) and Reckon Limited (ASX: RKN). More importantly, the company's public profile has seen its popularity in Google searches eclipse competitor Myob. This should translate directly into increased sales in all regions and is vital for growing and maintaining market share.

I believe that this combined with Xero's constant innovation (below) gives the company an expanding moat.

  • Innovation

It's not enough to simply be in front of your competition; far better to be working on your next step while your competitors are still trying to catch up with the last one.

Recent developments announced by Xero, including a partnership with Dropbox (allowing stored files to be imported directly to Xero) and the ability to create invoices and quotes directly from Google's 'Gmail' show the company is looking to the future.

The more that Xero can integrate itself with other business-related web services (like email, document storage, tablet/mobile usage) the more indispensable it becomes for users and the harder for rivals to oust from its position in the market.

  • It's cheap AND successful

In addition to trading around its lowest point in the past 12 months, Xero also has a track record of performance. It's become apparent that Xero's recent rapid growth is capable of being repeated and anyone looking more than 12 months ahead should see the company as a bargain. Major investors have bought in at prices substantially higher than today's levels which is another vote of confidence in the stock.

While I don't expect profitability to come anytime soon, at high-double digit rates of growth (sustained by continued reinvestment and the #1 position in search engines) I expect today's prices will appear very cheap in the future.

  • Foreign exposure

Xero earns predominantly in Australian and New Zealand dollars at the moment. However, as growth ramps up, it is going to increasingly become a favourite of investors seeking foreign currency exposure.

Already one quarter of earnings (in Australian dollar terms) are earned in foreign currencies – great news in the new era of a weak Australian dollar.

  • Big investors are backing it

Venture capitalists Accel Partners recently invested a further NZ$100m in the company earlier this year at a price some $5 higher than the going price for shares at the time. Accel invested at the equivalent of around AU$19 – which is 25% more than Xero sells for right now.

Given that Accel has a history of picking big winners like Facebook, Spotify, and Dropbox, I take their continued faith in the company as a positive sign.

Are you still surprised I quadrupled my holding?

With all these factors working for it, today's prices look like an excellent opportunity to buy into or stock up on XERO.

Motley Fool contributor Sean O'Neill owns shares of Xero. 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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