XERO FPO NZX subscribers surge: Is this hot tech stock a buy?

Despite the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) sinking lower, the shares of fast-growing accounting software-as-a-service (SaaS) provider XERO FPO NZX (ASX: XRO) have climbed 3.5% higher in morning trade following the release of an impressive half-year result.

For the first half of FY 2017 Xero reported a 48% increase in operating revenue over the prior corresponding period to NZ$137.2 million ($130.6 million).

Driving the strong top line growth was a stunning 45% increase in subscriber numbers. As of September 30 2016 Xero had 862,000 subscribers thanks to strong growth in all of its key markets.

The Australia and New Zealand segment grew 39% to 592,000 subscribers, in the UK subscribers grew 61% to 164,000, and in North America the company reported a 64% rise in subscribers to 77,000.

Perhaps most impressive is that subscriber momentum has increased. In the 12 months to September 2016 Xero added 269,000 subscribers, compared to 242,000 subscribers in the 12 months to March 2016.

During the half the company made a net loss after tax of NZ$43.9 million, roughly in line with the same period last year. This was partly the result of Xero’s transition away from Rackspace to Amazon Web Services (AWS) creating duplicate platform costs which negatively impacted its financial performance.

But I wouldn’t be concerned about that. The move to AWS brings with it exciting opportunities for Xero to improve the product and the business overall. Management advised that when the transition completes it will enable the company to leverage machine learning technology, deliver fast-paced innovation, improve margins, and increase uptime.

In addition to this during the transition the company has developed hundreds of new product features as it looks to drive innovation in the industry.

Whilst some investors may look at Xero’s loss and be concerned, I would pay less attention to those numbers and focus on its subscriber growth instead. Companies like Xero will often delay profitability and instead focus on investing in the business to drive growth.

With NZ$137.9 million cash and short-term deposits on hand, I feel the company is positioned well to manage cash usage to break-even.

There are a number of exciting SaaS companies on the ASX such as Aconex Ltd (ASX: ACX), Class Limited (ASX: CL1), and WiseTech Global Ltd (ASX: WTC) for investors to choose from. In my opinion this result proves that Xero is up there with the best of them.

If you need to make space in your portfolio for Xero then getting rid of these three wealth destroying shares could be the thing to do in my opinion. Are they in your portfolio?

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia owns shares of Class Limited, WiseTech Global, and 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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