One company I think is worth watching closely in 2017 is XERO FPO NZX (ASX: XRO).
For the past few years Xero has been operating an aggressive growth strategy requiring high cash outflows to win new subscribers, but 2017 could be a key turning point for this strategy.
The cash burning has put off a lot of prospective investors, but by growing revenue faster than operating expenses Xero is quickly closing the gap to positive cash flows. This will make the company appear far less risky and likely drive more demand from investors.
On top of this I expect 2017 to be positive in continuing to grow long term value.
Growing bigger and better
Xero is now the market leader in Australia and New Zealand and will be storming towards 1 million total (worldwide) subscribers in 2017.
The U.K and U.S. markets represent the biggest growth opportunities, but also face aggressive incumbent competitors. The U.S. market has the additional challenge of multiple tax systems. But Xero has proven its ability to dispatch smaller competitors and is in great shape to take on the challenge.
Fighting fit…
One of the things I value about Xero is the 'network' effect it creates by winning over accountants and leveraging their influence to convert small-to-medium businesses to use Xero. It creates a natural tailwind for marketing the product, rather than fighting against the big marketing budgets of rivals, while complementing the direct sales channel.
The strategy relies on building strong partners and links with bank systems which Xero started building this year and will benefit from in the coming 12 months.
…and closer to profit
In the six months to 30 September 2016, Xero reduced the net outflow of cash from its operations from a loss of NZ$23 million, to a loss of NZ$13 million, edging closer to the point where the business can self-sustain operations.
Xero's share price has reduced by 10% so far in 2016, while the company has continued its trajectory towards the strong expectations held by investors.
If Xero can continue to perform towards profitable operating cash flows in 2017, I think investors will renew their confidence in the company and shares could rise.
In May 2017, Xero will report its full year results for the year to 31 March 2017.
