Shares in cloud accounting company XERO FPO NZX (ASX: XRO) have been rocked 5.4% in the first wave of 'Brexit' selling, well above the 3% fall of the S&P/ASX 200.
It was also way higher than falls in similar companies including MYOB Group Ltd (ASX: MYO), which fell 2.9% and Reckon Limited (ASX: RKN), which dipped just 1.6%.
Why Xero got hit
Xero has a moderate exposure to the U.K. economy, and the potential implications of 'Brexit' could hit the company in several ways.
The U.K. makes up around 25% of Xero's 717,000 subscribers, and 18% of revenue in the 2016 financial year, so straight away we know there is going to be a noticeable impact of the weaker U.K. pound against the New Zealand dollar, which Xero reports in. The pound dropped almost 8% against the NZD which I think is fair to call a right bollocking.
The second concern is the widely held view that the U.K. could now be headed for a recession if businesses go into lockdown and stop spending and investing while a deal gets done to sort out the country's future.
A recession has the potential to slow Xero's subscriber growth in the U.K. which was a standout 60% in 2015. Given Xero targets small and medium companies, less spending and fewer new business ventures could increase competition for signing up existing companies, potentially raising the cost of winning new subscribers.
Xero's U.K. exposure explains why its shares were hit a lot harder than MYOB Group Ltd which has a sole focus on Australia and New Zealand.
Should you buy?
It's easy to see why investors are nervous of Xero's exposure to the U.K. and the potential impact on growth going forward.
They are legitimate concerns and could impact Xero's share price further if markets remain volatile in the weeks ahead.
However in my view the engine driving the company's global prospects still runs hot in growing the brand and generating significant reoccurring revenue. I especially like Xero's long-term potential, so I will pounce if shares continue to weaken.
