Here’s why the XERO FPO NZX share price could shoot higher in 2017

Cloud accounting software provider XERO FPO NZX (ASX: XRO) held its annual general meeting in Sydney today. The company announced that long-time board member Sam Morgan would step down as he feels that after nearly 10 years as a director it is time for someone else to take his place.

Aside from that the meeting contained little new information on how things are tracking but it is clear that management is optimistic about the future of the business.

CEO Rod Drury believes that Xero is by far the leader in the global cloud accounting software market, although he laments that other providers are not transparent with their figures. Xero’s growth is accelerating with 242,000 new subscribers added in the year to March 2016 versus 222,000 for the 12 months to September 2015. At current rates Xero should exceed 1 million global subscribers in the next year adding roughly NZ$100 million of annualised revenue in the process.

Much of this growth will fall to the bottom line as the company has progressively improved its gross margins which now stand at 78% having risen from 67% in the first half of 2015. Management believes that there is still room for improvement and highlighted that the recent transition to Amazon Web Services will reduce costs further.

Amazon Web Services will also provide Xero with access to a range of machine learning tools which will hopefully drive greater automation for customers saving them time and money. It could prove difficult for Xero’s smaller competitors to utilise these self-learning algorithms as they require large amounts of data.

Rod Drury said that over time he is confident of succeeding in the giant US market where cloud accounting software has been slow to take-off in general. He sees the recent data sharing deal with Wells Fargo & Co as significant because it is the first that Xero has done with a major US bank and further endorses the product. Such integrations have helped drive adoption of Xero in other markets as they enable the automatic posting of bank transactions which saves time.

In a previous article I suggested that recent price cutting by competitors might harm the long-term profitability of the industry. However, when responding to a question on pricing Chief Marketing and Revenue Officer Andy Lark said that competitors were simply offering upfront discounts to encourage customers to switch rather than reducing prices overall.

With it looking increasingly likely that Xero will reach 1 million subscribers, the next major milestone is $1 billion dollars in annualised revenue.

The company does not necessarily have to win market share from incumbents to achieve this given roughly half of people who join Xero have never previously used specialised accounting software. Xero has a current market capitalisation of $2.5 billion which looks reasonable to me given it is the leader in a global market that could be far larger than anyone first thought.

If you are interested in quality dividend shares, then I would recommend this top dividend share instead. A strong yield and potential share price gains make this a great investment idea in my opinion.

Our Top Dividend Stock for 2016

Our resident dividend expert names his Top Dividend Share for 2016. Not only are the shares dirt cheap, the company is trading on a fat fully franked dividend yield. Simply click here to gain access to this comprehensive FREE investment report, including the name of this fast growing ASX dividend share. No credit card required!

Motley Fool contributor Matt Brazier 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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.