Why I own XERO FPO NZX shares

This month I thought it would be interesting to take a candid look into what I own in my own investing portfolio and, more importantly, why I own it.

I started with SKYCITY Entertainment Group Limited-Ord (ASX: SKC) which forms part of the core economic engine of my portfolio.

The growth pocket

Cloud accounting company XERO FPO NZX (ASX: XRO) falls into the ‘growth’ pocket of my portfolio. This pocket holds companies with aggressive growth trajectories which are busy reinvesting in themselves. They are higher risk because their future earnings are uncertain, their valuations are hard to pin-point, and they are just not conventionally “cheap”.

There are plenty of fast growing tech companies on the ASX, but for me Xero made the cut for several reasons.

Strong competitive position

Xero was a first mover in the cloud accounting space, building a beautiful, functional product for customers and quickly capturing market share. The company does one thing, and it does it well, partnering with some of the biggest companies in the world to drive growth and embed the software into the heart of a budding company’s enterprise system.

Xero has quickly become a brand in itself and the resulting strong competitive position gives the company valuable pricing power which is a huge asset.

Global potential

The rules may vary slightly, but the discipline of accounting is universal and Xero has proven it’s ability to conquer new markets both in Australia and the U.K. This gives me confidence that the company will be able to adapt to the challenges of the big U.S. market which has multiple tax challenges, with both Federal and State level tax systems.

It’s not hard for me to visualise Xero leveraging it’s brand and successful partnerships with big banks and spreading further around the world in the next decade.

Reliable management

Xero’s management has proven it can deliver on the expectations it sets for investors, and the significance of this for companies priced for growth cannot be emphasised enough.

I was impressed with the news that Xero has begun managing its cash flow towards break-even and I think that when that point comes there will also be a spike in interest in the company from investors in the global markets Xero operates in.

So long as Xero can maintain it’s reliable performance I am comfortable to build on my position over time, being mindful not to ‘over-weigh’ the growth pocket of my portfolio which would add risk.

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Motley Fool contributor Regan Pearson 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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