Will Brexit hurt the Xero share price?

The uncertainty surrounding Brexit has already caused a lot of volatility in global markets. The British Pound is currently buying US$1.30, compared to US$1.65 five years ago. More concerning (from both a human and investing perspective) is the potential inability of companies to move goods and people freely throughout the European Union.

Xero Limited (ASX: XRO) launched in the United Kingdom on 10 December 2007, before even launching in Australia – so how will the decision on 29 March impact on the business?

The business

The Xero share price is a 10-bagger since listing on the ASX in 2012, closing down 0.78% at $48.63 on Friday. Xero is a cloud-based accounting software provider to accountants, bookkeepers and small-to-medium sized businesses. The company operates primarily in Australia & New Zealand (ANZ), the UK and North America. Xero is a great business with a quality product, high recurring revenues, demonstrated pricing power and growth in multiple markets.

For the half year ending 30 September 2018 revenue increased 37% and annualised monthly recurring revenue jumped 40%. The company is still unprofitable, as it continues to invest in its products and grow its subscriber base. Xero has roughly 1.6 million subscribers worldwide, with 62% of these based in ANZ. The market opportunities in the UK and North America are much larger than ANZ. Pleasingly the company saw its UK subscriber numbers increase 40% to 355,000 and its North American subscribers increase 62% to 178,000.

The UK opportunity

CEO Steve Vamos is very excited about “the headroom for Xero’s growth in the UK”.

On 15 November 2018, Xero announced its strategic initiatives to increase the adoption of cloud accounting in the United Kingdom. This included the acquisition of Instafile, for up to £5.25 million. Instafile is a cloud-based accounting and tax preparation solution that connects accountants and small businesses to the UK equivalent of the ATO, HMRC. Instafile links directly to Xero, allowing the preparation and filing of corporate tax returns and statutory accounts. The acquisition will compliment the company’s Making Tax Digital for VAT offering and full bank feed coverage – all of which improve Xero partners experience and efficiency.

Foolish takeaway

The market opportunity for Xero in the UK is much larger than in ANZ. The economic impacts of Brexit will have a ripple effect throughout the region and may slow corporate growth, and thus spending. Despite this and the growing competition in the accounting space, I see Xero as a great long-term company with strong fundamentals. Xero reports its 31 March 2019 full-year results in May 2019 and currently expects to be profitable in FY20.

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Motley Fool contributor Proutlb95 has no position in any of the stocks mentioned and expresses his own opinions. 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 Scott Phillips.

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