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Xero (ASX:XRO) - CEO, Steve Vamos - The Market Herald
CEO, Steve Vamos
Source: Xero
  • Accounting software specialist Xero (XRO) is one of the few stocks to fully recover from the March COVID-19-induced slump and trade above where it sat at the beginning of the year
  • Xero shares are currently worth almost 16 per cent more than the start of January and 57 per cent more than the start of March
  • The company's success is largely attributed to the uptake in demand for accounting software as small and medium businesses work hard to monitor cash flow and cut costs
  • Xero's gains have been supported by gains in wider global tech sectors as the coronavirus pandemic keeps people indoors
  • Analyst ratings differ widely for Xero, with Morgan Stanley pricing shares at $100 each, while UBS has the company at $58.5
  • As it stands, Xero shares are worth $92.38 each in a $13.13 billion market cap

Accounting software specialist Xero (XRO) is one of the few stocks to fully recover from the March COVID-19-induced slump and trade above where it sat at the beginning of the year.

The New Zealand-based company doubled its share price over 2019 and looked primed for similar growth in 2020 before the pandemic struck. From the start of January to mid-February, Xero shares increased by over 11 per cent.

Of course, when the virus hit, shares shaved off one-third of their value.

Today, Xero shares closed 3.8 per cent above their February high at $92.38 each — 57.24 per cent higher than the March slump.

Xero's share price movement over 2020

So, how did Xero do it?

Xero's tech is designed to provide simple accounting services to small and medium businesses (SMBs). From bank transactions to invoices to payroll to job tracking, SMBs can complete all of their account needs through the company's software.

Importantly, the company's tech is entirely cloud-based — meaning access and storage is easier and quicker than conventional server-based accounting solutions.

Since the coronavirus ravaged economies, governments across the world have released unprecedented stimulus packages and fiscal support to their respective countries in an effort to offset the virus' economic damage.

In Australia, for example, individuals and businesses alike were offered support in the form of government grants and schemes, such as the JobSeeker and JobKeeper packages.

On top of this, SMBs went into cost-saving hyperdrive as they fought to stay afloat.

As such, accounting services saw a surge in demand. Xero's software helps businesses closely monitor cash flow to make sure the necessary cuts are being made wherever they can be.

As far as financials go, Xero's financial year ends on March 31, meaning the company was able to book most of its last financial year revenue before the pandemic struck. Over the last financial year, Xero reported its first-ever annual profit of just over $3 million, spurred on by a 26 per cent growth in total subscribers to 2.285 million.

Annual earnings before interest, tax, depreciation, and amortisation (EBITDA) increased by 88 per cent compared to the year before, and the company said it had over $735 million in available liquid resources at the end of March.

Xero's strong cash position and uptake in demand put investors' minds at ease, and the company's share price rebounded steadily from the March slump.

Big tech wins

Of course, it would be remiss to ignore the wins across the wider global technology markets when talking about Xero's gains.

The switch to at-home work has seen tech stocks surge, and our local ASX tech sector has doubled in value since March 23.

The U.S. Nasdaq index, which is home to the likes of Facebook, Apple, Microsoft, and Google parent company Alphabet, has increased in value by over 78 per cent since March 23.

As such, Xero's win has been largely supported by solid gains among its tech peers.

Where to next?

Interestingly, it seems Xero is already outperforming analyst predictions from the months after the coronavirus sell-off.

Xero has been assigned an average price target of $85.88 from 13 Wall Street Journal analysts. Admittedly, the analysts have some major price target differences, with the highest valuing Xero at $112.44 per share and the lowest at $59.54 per share.

With only three of the analysts rating Xero a 'buy' and four rating the company a 'hold,' this suggests some uncertainty for the future of the stock among the analysts. Two called Xero overweight, one called it underweight, and three rated it a 'sell' at its current price.

Morgan Stanley has recently upgraded its Xero price target from $85 to $100 and kept its overweight rating.

Credit Suisse has held its $88 price target for Xero, while UBS is the most bearish of the major analysts, pricing Xero at $58.50.

Xero itself has remained relatively quiet since the release of its last annual report. The company admitted in May that the uncertainty from the COVID-19 pandemic means it is tough to make any accurate predictions, and as such no 2021 guidance was given.

It would appear that since then, investors have been operating on a "no news is good news" basis. The company's half-year annual report will be telling, but as it stands, it seems the market has decided Xero is a good bet in a time of severe market volatility.


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