Back in May 2016 I wrote an article asking is Xero a blue-chip share of tomorrow when the stock sold for $16.53 and most institutional investors baulked at its large losses.
The article concluded that it was a buy and included a couple of back of the envelope forecasts around revenue growth (compound 40% between 2016 to 2019) and total revenue around NZ$568 million that now look likely to be accurate given Xero's half year 2019 interim results showed revenue up 37% to NZ$256.5 million.
The article also estimated that on this basis the share price had room to roughly triple which it has done and a little more.
Digressing slightly the May 2016 article also complains about the inability of private investors to buy into the best junior U.S. tech companies such as Slack because they are privately held. Notably, Slack is now coming to IPO this June on a reported US$17 billion valuation after 3 years of blockbuster growth between May 2016 to 2019. For overseas investors it's a business I still reckon is another potential blue-chip of tomorrow.
Since May 2016 Xero shares are up about 240% and many institutional fund managers now regularly name it in the business media as their favourite blue-chip share of tomorrow to buy.
To be fair they might still be right as there's no reason why Xero shares can't keep moving higher given its attractive software-as-a-service economics and large overseas growth opportunities.
It's just that the stock doesn't offer as much raw upside as it did 3 years ago.
If you want to make massive returns in the share market you need to find the 'blue chips of tomorrow' before they hit valuations around $7.7 billion in the case of Xero, or US$17 billion in the case of Slack.
Although it might seem preposterous given its trailing financials one business it seems other investors are betting on as a blue-chip of tomorrow with more raw upside potential is the now $2 billion software-as-a-service medical imaging and radiology outfit Pro Medicus Limited (ASX: PME).
Just this morning the stock is up 4.5% to a record high of $19.90 and is up 75% over 2019 alone.
I've covered the business in dozens of articles over more than 4 years and still think it has an excellent long-term growth outlook.
While its smaller market cap means it has room to compound returns harder for investors if its sales growth accelerates.
Moreover, Pro Medicus is already profitable (it even pays a dividend) which I think goes a long way to explaining its huge profit and sales multiples compared to unprofitable SaaS businesses such as Xero.
However, I'd caution anyone interested in buying into Pro Medicus that it now has an awful lot of growth baked into its valuation.
As such I'd rate it a 'buy', but only at a significantly cheaper valuation, which I expect patient investors may get before August 2019.
