An ASX share I've been watching with great interest during this ASX bear market has been Xero Limited (ASX: XRO).
Xero is one of the only WAAAX shares not to have fallen too far from grace in this stock market crash. On current prices, Xero shares are asking $78.56 – which is only around 15% off of the all-time high Xero was trading at prior to the coronavirus outbreak. In saying this, Xero did go all the way down to $58.75 when shares were bottoming out in late March.
But here's where things are interesting for Xero. That price wasn't even Xero's 52-week low. In fact, it only translates into the share price Xero was trading at back in May last year!
Clearly, this isn't a share the markets are giving up on at all and indeed, perhaps has more faith than most in surviving this economic crisis we find ourselves in.
Does Xero have a moat?
A moat is something Warren Buffett has described as a 'long-term, intrinsic competitive advantage' that a company can possess. The most obvious example is something like the brand power that a Coca-Cola or an Apple (two shares Buffett incidentally owns) can command in their respective markets.
So does Xero's 'beautiful' accounting software for businesses have such an appeal? Well, looking at Xero's most recent numbers, one would have to conclude a strong case. In the six months to December last year, Xero increased its subscribers by 30% to over 2 million. During the same period, the company also managed to bump up its earnings by 91%. The latter number explains (in my view) why investors are happy to assign a price-to-earnings ratio of 4,224 right now.
But of course, those numbers were minted during a time when the global economy wasn't in full lockdown due to the coronavirus. Investors don't seem to think these shutdowns will materially affect Xero (judging by the share price here), but is this the case?
Xero's primary customer base is made up of small-to-medium-sized businesses. These are the businesses that are likely to be most disadvantaged by the lockdowns due to lack of scale. Tragically, many could face permanent closure. That's of course also bad news for Xero.
However, many companies will successfully be able to emerge from 'hibernation', and will likely be using Xero's software to restructure their affairs to include assistance payments like JobKeeper. Thus, I conclude that the long-term prospects for Xero's widening moat are intact, despite some potential short-term pain.
