Xero Limited (ASX: XRO) shareholders have had a very happy 2019 so far. Xero shares are up over 46% since New Year's Day, capping off a stellar rise over the last three years. In 2016, one share of Xero was going for around the $15 mark – which seems very distant from today's price of $61.22 (at the time of writing).
Putting the 'X' in WAAAX, Xero has become one of our most beloved 'tech darlings' over the last couple of years. ASX investors have fallen in love with Xero and are trying to forget the company was actually founded (and still head-quartered) in New Zealand in 2006.
What makes Xero so special?
Xero has been turning heads because of its use of the 'software-as-a-service' model (SaaS). Basically, rather than paying for the software outright, users pay to ''rent' it each month in a subscription model – anyone familiar with the Adobe's Creative Cloud suite (or even Netflix) would be familiar with how SaaS works. This type of business model is all the rage at the moment, particularly for tech companies.
Adobe pioneered SaaS back in 2013 when it switched from a 'purchasing software' model to the cloud-based SaaS model it has today. Adobe's stock initially fell on the announcement but you only need to look at Adobe's share price since 2013 to see how it has worked out for them.
Xero's success and investor interest are built on the same enthusiasm, as we now know how lucrative it can be. If you have a sticky and growing customer base paying a monthly subscription fee, it becomes a license to print money very quickly.
From Xero to hero?
So lets take a look at Xero's numbers. In the 2019 annual report (for the year ending 31 March), Xero announced annualised monthly recurring revenue of $63.8 million, up 32% year-on-year, while subscriber numbers also grew 31% to 1.82 million. This is obviously a fantastic (dare I say beautiful) set of numbers, but there is still the problem that Xero is not profitable, with a net loss of $27.1 million for the year. The loss as a percentage of revenue is down YoY from 6.1% to 4.9%, so its heading in the right direction. But potential investors in Xero should know that at this time, you are buying a share in a loss-making company.
Foolish takeaway
Xero is without a doubt a promising tech story and has the growth numbers to back it up. Although Xero is not yet profitable, management are clearly focusing on big growth at this stage of the company's life and, with the way the numbers are heading, this will eventually happen. If Xero can keep up the growth numbers, its SaaS model will eventually start to snowball and making big money. Keep in mind that this scenario is already built into the share price, and at these levels, a position in Xero is very speculative. I'll be sitting on the sidelines until the price drops back a bit on this one.
