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5 reasons to bet big on Xero Limited today

Let’s be honest; last week’s demolition of ASX listed tech stocks was primed to happen.

The market valuations of growth icons like WiseTech Global Ltd (ASX: WTC), Altium Limited (ASX: ALU) and Appen Limited (ASX: APX) has exploded recently. These companies have great long-term prospects and great stories to tell, but such strong run-ups in share price rarely continue uninterrupted.

One company I would love to buy more of though is cloud accounting platform Xero Limited (ASX: XRO). Here are five reasons I would still bet big on the company today:

1. Xero has incredible pricing power

Pricing power is Xero’s biggest weapon. The company has ‘sticky’ revenues which means it can increase pricing with minimal loss of customers (known as ‘churn’). Xero has increased pricing several times over the last few years while continuing to add extra features and rapidly grow subscribers.

2. Xero’s market of small businesses is growing

The internet has transformed the way new businesses are born and it has never, ever been easier to start a small business. This is a new dawn of entrepreneurship and Xero is perfectly positioned to support it with its monthly subscription model.

3. UK regulatory tailwinds

In the UK Xero is set to be a huge winner from the a significant government mandate to ‘Make Tax Digital’ by 2020. This will drive a fundamental shift to the adoption of cloud accounting and keep subscriber numbers climbing.

Xero had 312,000 subscribers in the UK at 31 March 2018 and Managing Director of Xero’s UK, Europe, Middle East and Africa business Gary Turner has said he thinks this number could triple over the coming years.

4. Ability to scale at higher margins

Xero’s ability to acquire new subscribers at very low incremental operating cost is a huge asset which can drive increasing gross margins. This helped Xero to report positive operating cash flows in FY18 which is a strong base for future growth.

5. Growth minded management

Maximizing this growth opportunity guides decision making at the management level as we saw with the decision to move Xero to a sole ASX listing to access better capital options for long-term growth.

The company’s new executive remuneration structure is also tied closely to growth objectives which will keep growth at front of mind going forward making a long-term bet on Xero attractive today.

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Motley Fool contributor Regan Pearson owns shares of WiseTech Global and Xero.

You can follow him on Twitter @Regan_Invests.

The Motley Fool Australia owns shares of Altium, Appen Ltd, 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 Scott Phillips.

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