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Why the Xero Limited share price is printing multi-year highs

The local share market’s most valuable technology business in Xero Limited (ASX: XRO) has hit highs not seen in more than 3 years today, ahead of the cloud-accounting business reporting its annual results early next month.

Despite retaining its Welllington HQ the company de-listed from the NZX in February to have a single listing in Australia and the stock has put on more than 20% since the restructure.

Shareholders in Xero’s NZ scrip automatically received scrip in the ASX-listing and a core strategic rationale behind the decision was to improve liquidity and get it included in major indices.

For example serious money managers investing tens of millions of dollars in a stock need liquidity so they don’t move the price too much and any stock below certain trading volumes is impossible for them to trade.

Xero also hoped to attract more analyst coverage and get itself on the radar of large overseas institutional investors with plenty of investing firepower.

As such it appears the strategy has worked with institutional buying likely powering the share price higher in recent months.

This will all count for nothing though if the company does not deliver operationally as it works towards delivering on its forecasts to reach cash-flow breakeven within its current cash balance.

Xero certainly has some attractive characteristics as an investment including its high gross profit margins, recurring revenues, and the large addressable markets in which it operates.

Back in May 2016 I called the stock a potential blue-chip of tomorrow and suggested it was a buy at $16.25 per share.

Since then the stock has more than doubled partly as a result of some strong growth and operational performance, but also probably because of the higher profile it’s now getting among institutional investors.

Today, the stock changes hands for $37.04 and as an investor I’d be inclined to let the market value the stock after it hands in its full year results in a couple of weeks’ time before potentially buying on the relative strength of the results.

Others to consider in the online accounting space include Myob Group Limited (ASX: MYO) or even fast-growing online superannuation platform business Class Ltd (ASX: CL1).

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Motley Fool contributor Tom Richardson owns shares of Xero.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia owns shares of Class Limited 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 Scott Phillips.

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