Morningstar

Morningstar, Inc.

Equity Bottom-Up

Narrow-moat-rated Xero’s fiscal 2019 result represented its 11th consecutive year of losses but the company continues to create value via strong subscriber growth and, importantly, unit costs continue to fall. Subscriber and revenue growth remain a top priority for two reasons. First, scale creates market dominance which should strengthen the brand and may eventually help create a network effect. Second, increasing scale will lower unit costs and potentially create a cost advantage by…

We continue to view the Australian and New Zealand SME accounting software market as a duopoly between Xero and MYOB. However, Xero’s strong growth in recent years was largely driven by its early-mover advantage in cloud software that is eroding. Looking forward, MYOB is likely to be a more aggressive competitor under the ownership of KKR who we expect will prioritize subscriber and revenue growth over profits in the short to medium term. MYOB is also likely to win market share from Reckon in…

We have maintained our fair value estimate for narrowmoat rated Xero at AUD 25.50 following its first-half financial results that broadly met our expectations. We weren’t surprised that the company remains loss making, nor are we concerned that the reported loss per share increased by 50%. At this stage, Xero’s primary focus remains on reinvesting profits to maintain high subscriber growth rates, and profitability is a secondary concern. The first-half subscriber growth rate fell to 31.7% from…

Narrow-moat-rated Xero has demonstrated its commitment to maintaining high revenue growth rates via the issuance of nearly half a billion New Zealand dollars’ worth of debt. The use of the new funds is yet to be determined but we expect the company will undertake further acquisitions, like the recent Hubdoc acquisition, which add functionality to its cloud-based accounting software platform. Although acquisitions may prolong losses from an income statement perspective, they are also likely…

New Zealand

Xero Limited offers an online accounting system.  The software features bank transaction importing, a cashbook, a general ledger, invoicing, accounts receivable, accounts payable, financial reporting, and management of expense claims.