3 Reasons why Xero Stands Out in the WAAAX Pack

Due to the successful journey of FAANG stocks in the US, the term WAAAX was incorporated in Australia, backing the premise that future lies in technology. WAAAX stocks include the following:

  • WiseTech Global Limited (ASX:WTC)
  • Appen Limited (ASX:APX)
  • Altium Limited (ASX:ALU)
  • Afterpay Limited (ASX:APT)
  • Xero Limited (ASX:XRO)

In the recent past, the market has struggled with the unstable economic and political conditions prevailing around the globe. Like any another stock, WAAAX stocks also felt the heat and witnessed a downfall in their respective stock prices during this period. In the midst of these conditions, one of the companies in WAAAX outperformed the market sentiments - Xero Limited. Xero is the company that went for listing on the stock exchange directly in 2006, instead of raising funds through venture capital.

New Zealand based company, Xero Limited (ASX:XRO) provides accounting software services based on cloud software. This software integrates with more than 800 business applications and serves to more than 2 million subscribers present globally. For two consecutive years in 2014 and 2015, Forbes labelled Xero Limited as the World’s Most Innovative Growth Company.

Viewing the stock performance of each these five companies in WAAAX during the period of 3-months and 6-months, respectively, we have observed the following:

  • Xero Limited has shown an exponential growth of 42.59 percent in a span of six months as on 20 January 2020. However, in the same span, WTC generated the lowest return at -14.58 percent.
  • Also, in the span of three months, Xero was able to deliver a positive return of 23.35 percent on its stock, while returns of the other four companies of WAAAX were in the range of -15.23 percent to 15.02 percent.

Let us look at some of the probable reasons for the consistent stock performance shown by XRO during this time frame.

The above growth pattern in stock movement over the past one year can pertain to the following three reasons.

  1. Strong Financials: XRO has worked on improving its product design, marketing, development costs, and gaining efficiencies in sales. The company has achieved a remarkable financial position as indicated in their Annual reporting for FY 2019 (period ending 31 March 2019) and Interim Report for FY 2020 (period ending 30 September 2019).

Key takeaways from annual performance (FY 2019) are as follows:

  • Growth of 36 percent in operating revenue from $406.7 million to $552.8 million and a 32 percent growth in AMRR (Annualised Monthly Recurring Revenue).
  • 52 percent increase in EBITDA from $48.2 million to $73.2 million, and an 81 percent increase in EBITDA excluding impairments and non-cash, share-based payments.
  • For the first time, the company delivered a positive free cash flow of $6.5 million which is 1.2 percent of operating revenue.
  • In the second half of the year, the company achieved a bottom line of $1.4 million
  • Total subscribers around the globe have increased by 31 percent, with a total subscriber lifetime value of $4.4 billion. Detailed bifurcation of subscribers by region is provided in the below table.

Key highlights of the interim results for FY 2020 (as against H1 2019) are as mentioned below:

  • Total employees of the group have increased by 18 percent from 2,302 employees in 2018 to 2,706 in 2019 (as at 30 September)
  • Operating revenue was $338.7 million, an increase of 32 percent and AMRR was $764.1 million with a 30 percent growth
  • Total subscribers increased by 30 percent with 2.057 million users
  • The bottom line of the company was noted as $1.3 million

  1. Strategic moves:
    • 2019 has witnessed the execution of two of its vital acquisitions of Hubdoc and Instafile. A data capture service company, Hubdoc helps in improvement of productivity for small business owners. Instafile is a tool for compliance and tax filing that allows the company’s UK compliance stack.
    • Xero has been raising funds via an equity market since its inception. The funds raised through an innovative convertible note offering in October 2018 has enhanced and amplified the growth figures of the company’s small-scale business.
    • The company mentions its strategic priorities under three categories: first, driving cloud accounting; second, growing of small business platform; and third, building for global scale and innovation.

  1. Experts appointments:
  • On 27 June 2019, the company announced that Mr David Thodey AO was appointed to the company’s board as a non-executive director.
  • As an outcome of the annual meeting with shareholders held on 15 August 2019, Ms Susan Peterson was re-elected as a director
  • On 13 December 2019, Xero announced that Mr David Thodey would succeed Mr Graham Smith as a Chair to the Board applicable from 01 February 2020.

There was an increase of 0.58 percent in the stock price of XRO as on the date of announcement (13 December 2019) about Mr Thodey being appointed as a Chair to the Board of the company.

Stock Performance of Xero Limited

On 22 January 2020, the stock of XRO last traded at $ 85.450, moving up by 1.811 percent compared to its previous closing price. The company has outstanding shares of around ~ 141.52 million and a market capitalisation of nearly $11.88 billion. The 52 weeks low and high price of the stock is $39.860 and $88.000, respectively. The stock has delivered a positive return of 36.23 percent and 98.70 percent in the last six months and one-year span, respectively.

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