Thursday, July 16, 2009

Stock of the Week: Xero Ltd

For this week's Stock of the Week I want to throw caution to the wind and pick a stock in an industry I know nothing at all about except that it has an over propensity of nerds working in it and some of them are billionaires.

The company is Xero Ltd [XRO.NZ] and the industry that it competes in is computer software, in Xero's case online business accounting software, you can find out more about Xero at Kelvin Hartnell's excellent blog, he is a big fan and a happy shareholder.

Warren Buffett says he doesn't invest in companies and industries he doesn't understand and the same goes for me, but some of you out there reading this just might know what this company is about and can see the potential it might have in the future.

Xero has yet to make money, but is making inroads into its sector of competence, big boys like Quicken and MYOB are starting to notice their presence but the company has still yet to make some green stuff. It doesn't look likely it will soon either.

Like I said though, the potential is there to make some big money, if they really take off or lose the lot if the company ends in tears. This is a high risk investment, with any payoff being long-term.

It has some big backers in New Zealand, like Sam Morgan of TradeMe fame but its share price has taken a bit of an upwards trajectory over the last 4 months going from around 65c to its present $1.38 at close of market yesterday, so it makes the company a whole lot more unattractive at these prices.

If you know this industry though, this stock could be for you on weakness.

Good luck!

Stock of the Week Series

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Sky City Entertainment Group
Burger Fuel Worldwide
Michael Hill International
Contact Energy Ltd
The Warehouse Group
Fisher & Paykel Appliances

Xero @ Share Investor

Share Investor Interview: Xero's Rod Drury

FY 2010 Profit Result
Xero Ltd: Download full Company Analysis
Rod Drury ready for the long-haul with Xero
Rod Drury on Xero and Growing Business
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Love Xero?
Share Investor's 2010 Stock Picks
Stock of the Week: Xero Ltd

Discuss Xero @ Share Investor Forum

c Share Investor 2009


  1. Darren,

    why exactly, is this stock the stock of the week?


  2. Well, for a number of reasons but the main one is its potential to do very well if it continues along its current development path.

    Those within the industry and those that are familiar with the company are very excited about the business.

    Not many people in the wider investment community (Mum and Dad stockholder)know much about the company because the brokerages don't cover the smaller listed businesses well or don't understand them fully(like me)so I thought I would write something on it based on its potential.

    If it goes well the company will be a significant one in the future.

  3. Hi Darren,

    I'm an original shareholder in Xero and a Xero user. It will be the local success story of the next 5 years.

    Why? Think of Sky Television, which is a successful company with excellent cashflows based on monthly subscription payments. Now imagine Sky TV with a global reach, and no need to create or pay for content, as the subscribers actually create their own content. This is the Xero model, and it's working well. The 10,000 user update won't be far away, and this number is growing exponentially.

  4. Great post. I think you bring up a good point about the Warren Buffett's circle of competence. In my case, being a software engineer, I justify my investments in software companies such as Xero on the basis that I understand the business better than I understand the concrete product market (FBU) or the future of the freight market (MFT). From my experience as a software developer, I have watched Xero develop over the previous 18 months and have been very impressed by their nimble iterative approach to software, their competence in design, and the success of the software so far.

    I suggest that anyone who is interested in this stock to visit Xeroand sign up for a free trial account. This will give you a good understanding of how their product compares to MYOB or other SME accounting products you have experience with.

  5. Hi Kelvin, what of the question about some cheeky start-up gazumping Xero the same way it seems to have taken the breath away from the established players itself.

    In any business this is a threat but in the software biz I understand this is a more crucial threat given that new software is constantly being worked on.

    Check out what this guy had to say to me two years ago about Xero.

  6. Further to the fact that the big players in this part of the software biz are taking notice of Xero, every competitor of Xero's has had a look at this story today.

    That is one reason why I chose this stock as Stock of the Week. Xero seems to have the big boys worried.

    A good sign Xero is doing things well and perhaps taking customers off the established players.

    Perhaps a lazy two thousand should be going into Xero stock for my portfolio :)

  7. Darren,

    The market for accounting packages in the initial Xero markets of NZ, UK and Oz is around 5 million potential businesses. The pie is big enough for several players.

    There already are, and will be more competitors in this online accounting market. People are migrating to web based (or "cloud" as the techies call it) systems now through gmail, facebook, salesforce etc. Xero and others have proven that accounting systems can work very well as a web based tool.

    What Xero has done, brilliantly, is work in with banks and accountants to find out what it would take for these companies to recommend it to their own clients. Check their annual reportr and you'll already see that BNZ have invested a portion of their unpaid tax dollars into Xero, as has Craig Winkler who founded MYOB.

    For what it's worth, my personal opinion is that in the Google v Microsoft battle for the internet dollar both will be looking for a credible, proven accounting package to add to their online offerings of Word, Excel, etc. Could be a small Wellington based company with some interesting names on the share register very soon.

  8. The software itself, anyone can write. Accounting is widely understood by many and it is fairly easy to write a good accounting software. In the case of Xero useability is good with the current feature set.

    There are several factors which help Xero to have an edge. They are targeting the SME customer using enterprise level infrastructure. They are using accountants and affiliates (e.g telcos) to on sell to thier customers, rather than going direct. They have direct connections to most of the banks for automated reconciliation, not just the major banks. They have import and export functionality to be able to move a customer into the platform and off the platform as they like. Giving the customer confidence they should try it, and can back out if needed.

    Of course these features are not all unique to Xero, but they have executed these features well.

    If they can get business in Canada and the US, then users will increase substantially. The technology is very scalable to be able to support very large markets. The application should therefore also be scalable using the Microsoft .Net technology, but depends on how well the code is written.

  9. I see Darren, you bought in today with a cheeky $0.5M

    Good luck

  10. I use Xero software in my business and I especially like the user friendliness of its operation.

    The back-up in customer service is bloody brilliant!

  11. I see Darren, you bought in today with a cheeky $0.5M

    Good luck

    Ahh, if only anon ;)

  12. 10,000 users confirmed today. Predictions -

    15,000 before December 09,
    20,000 in March 2010,
    30,000 in Sept 2010.

    These numbers are based on the last 6 months average, of 35 new users per day. The question of "will they succeed?" is now defunct. "How big can it get?" is what should be on everyone's mind.

  13. Just to be clear folks my correspondent and myself are joking about me taking a Xero stake.

    I have NOT bought or thinking of doing so.

  14. Hi Paul, My interest in the company is how big will it get too and the buzz around the traps is that it could succeed - get bigger. Surely though the size of the company is relevant to its success, since at its current size Xero still has yet to make any money.

    The measure of success for any company is surely the return it makes on money invested and I will reserve my final judgment until the first profit starts to roll in.

  15. Fair enough too :) Am enjoying your site.

  16. I wouldn't miss the boat on this company.

    The upside potential is phenomenal, even a small holding could make a huge difference to your portfolio.

  17. I am very tempted to put a lazy couple of grand into the stock on weakness in case you are right anon.

    Man this company has some great cheerleaders!

    Thanks Paul, I appreciate your comments on this company...

  18. More than welcome. Did I mention the partnerships they have struck with Telecom, Telstra and British Telecom to sell Xero as part of their own range of services in NZ, Oz and UK repectively? :)

  19. 12,000 users in 50 countries. Share price of 1.55 and climbing. Is that a boat I see starting to sail away from those too cautious to invest?

  20. Hi again Paul. I think alot of the upwards share price movement is in the general market sentiment overall.

    Investors in Xero need to be wary of the long term payback they are looking at when they invest in Xero and enter the stock where they see the value based on that.

    We just don't know when the spending to grow will slacken and profits begin.

    Do we?

  21. Read the annual report & AGM. Break even is expected around 30,000 customers. At 30,000 users expenses are covered and each sign up thereafter is almost pure profit.

    Current take up rates will get there in 2011, but this should take less time if the current trend of doubling users every 6 months continues.

    Go on to twitter and read the glowing comments compared with MYOB. Momentum has kicked in -defensive shares are all very well but Xero is already becoming THE growth story of the NZX.

  22. The interest in Xero from its competitors is interesting.

    There have been hits from all its competitors and most recently from Intuit in Santa Clara CA.

    Taking them seriously I guess.

  23. Darren it's good to see your increased interest in Xero, however it's important to clarify that Xero is accounting software, not payroll software as you have written.

    What you may not be aware of is the growing number of software providers who have made the effort to integrate with Xero (including payroll!). These include , and among others; all successful entities in their own right who are confident of where the market is heading.

    Xero is still a growing company, but it's need to prove credibility in the market has well and truly passed. Any share investor looking to build a growth portfolio rather than purely defensive would do a lot worse than allocate a portion of their capital into Xero.

  24. Hi Paul, where have I mentioned that?

    Point it out to me will you and I will change it...

  25. Line 1 of your Xero coverage in the 2010 stock picks.

  26. Can some of you Xero heads confirm or deny this?

    Was a comment on another post and says there was an announcement today re customer numbers and it wasn't going to be good.

  27. PAUL SAID, I'm not privy to any information not already in the public arena. Check the NZX announcements anytime from 9am tomorrow - these guys report fast as is expected from an accounting software company.

    And don't say you weren't given a heads up over a year ago :)

    Paul, the customer information isn't yet in the public arena, so the person who tipped at 11.21 this morning was breaking securities law if your heads up is correct.

  28. I would not have traded on this news had I been privy to it this morning BTW.

  29. Darren, whatever information you were given by Anonymous this morning I doubt if it had anything to do with insider trading.

    One of my pet irritations is "financial commentators" who do nothing more than comment on stocks in or around the NZX 50, with little regard for smaller companies who may have a really good story to tell. It is obvious to anyone in accounting circles that Xero is making waves, and a top result tomorrow would be completely unsurprising.

    Let's just hold out for the result.

  30. Hi Paul, It does have to do with insider stuff and if anon knows everyone should know and clearly he does know something.

    I am not saying he or anyone else traded on that information but it is out there and the possibility is that somebody has.

  31. Fair enough. For the record my predictions are purely based on having followed this company very closely since 2007, including setting up a Google alert to track Xero feedback across the net.

    If Anonymous did pass on any specific info (which I don't think he / she did based on your original take) I'll leave it with you to pass this on to the relevant authorities.

  32. Nice predictions:

    Are these yours?

    Predictions -

    15,000 before December 09,
    20,000 in March 2010,
    30,000 in Sept 2010.

  33. I'll have to take the rap for those, yes. After the 30k mark I've really got no clue, but I'm sure there's a mushroom effect that kicks in at some point.

    These numbers only relate to the "Xero business" software, and not "Xero personal" which went live this week also.

  34. I do of course have to write something about my tipster friend...

  35. Off to watch the boxing. I look forward to further animated discussion tomorrow :)

  36. Interesting times on the Xero front. Look forward to an interesting 2011. Merry Christmas all.


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