After a couple of years bumping along at $15 a share, the XERO FPO NZX (ASX: XRO) share price appears to be undergoing something of a revival. It could be part of the enthusiasm for tech stocks that has gripped several other businesses lately. Or it could be that investors (again?) think that Xero is a great business.
Shares have risen 43% to $23.17 in the past 12 months and the next major milestone would be $25, a price not seen since early 2014. Will Xero get there? Investors have been buoyed by the news that the company will likely reach break-even within its current cash balance, a relief after several years of heavy losses (due to investing in growth).
Now that a capital raising is not a concern, the company's growth prospects are coming back into view. Even in markets which it already dominates, like New Zealand, Xero has been going great guns. New Zealand customer numbers jumped 35% to 186,000, while total ANZ customers were up 57% in the most recent report. International customer numbers are growing even more rapidly, up 95% albeit from a lower base.
Some target markets like the USA and UK are much bigger than ANZ, and Xero would become many times larger if it could replicate its market share in those markets. Unfortunately, the company faces stiff competition from entrenched incumbents, but as marketing continues and word of mouth grows, the business has a good shot of achieving at least a #3 or #2 position in its international markets.
Importantly, Xero has only been selling one product so far – its accounting software. With satisfied customers and high levels of retention there appears to be additional potential for the company either to add new products or raise the price on existing products. Arguably as the Xero software increasingly automates more and more functions (saving time and improving productivity for business owners), customers will be willing to pay more for more features, although this depends on competitors also.
While it is important not to get too bullish on Xero's prospects, the company has a clearly laid plan for growing customer numbers (and thus earnings) and I would not bet against it hitting $25 in the next 12 months.
