ASX:XRO
Xero Ltd
Investment Summary
The fund managers believe that Xero Ltd (ASX:XRO) presents a strong long-term growth opportunity, as evidenced by their share price increase of approximately 15% to $127 in February 2024, and further growth to around $135 in May. In their opinion, the company's shift to a high-quality, recurring revenue model has proven pivotal, with free cash flow (FCF) rising dramatically from ~$12m in FY22 to ~$121m in FY23, and projected to reach ~$226m in FY24, highlighting a CAGR of 28% to ~$459m by FY27. Additionally, XRO's successful rollout of its '3x3 Strategy' aims at expanding into core and adjacent markets. The fund managers noted XRO's recent cultural shift under CEO Sukhinder Singh-Cassidy, which has led to a record EBITDA margin of 31% and strong FCF growth exceeding 280%. Despite minor setbacks, they maintain a positive outlook, perceiving XRO as a high-quality company with a significant long-term compounding growth profile in the global accounting software sector.
Commentary From The Managers
Blackwattle Investment Partners
31 Mar 2025
$154.75
- XRO was the largest negative contributor to performance during the month.
- XRO fell 9% in March as ASX Technology stocks sold off following leads from the US.
- XRO had been a solid performer in 2025, with strong expectations for further earnings improvement.
- US TAM expansion is expected to be announced at the FY25 result in mid-May.
- We continue to see strong upside for XRO as they progress towards being the market-leading global accounting software for SMEs.
- Strong financial metrics are anticipated, driven by the new management team.
- We expect CEO Sukhinder Singh-Cassidy and her team to drive profitable sales growth and invest for market share expansion.
- XRO is viewed as one of the highest quality companies on the ASX with a significant long-term, compounding growth profile.
Blackwattle Investment Partners
30 Nov 2024
$174.55
- XRO was the largest positive contributor to performance during the month.
- XRO rallied 16% in November on the back of a strong 1H25 result.
- XRO is a market-leading, global accounting SaaS platform.
- XRO’s 1H25 result showcased benefits of the cultural change brought in by CEO Sukhinder Singh-Cassidy in early 2023.
- XRO delivered 25% revenue growth, an EBITDA margin of 31% and free cash flow growth of over 95%.
- XRO's results beat market expectations and demonstrated increasing pricing power, momentum in payments, and subscriber growth.
- Market expectations remain conservative with consensus anticipating a significant fade in revenue growth.
- Blackwattle Investment Partners continues to see strong upside for XRO as it aims to be the leading global accounting software for SMEs.
- XRO is viewed as one of the highest quality companies on the ASX with a significant long-term, compounding growth profile.
Endeavor Asset Management
31 May 2024
$135.00
- Xero's share price increased by 10.6% in May, indicating investor confidence in its long-term growth strategy.
- The company reported a strong FY24 result with better than expected EBITDA margins due to effective cost management.
- FY25 cost ratio guidance of ~73% appears conservative, given 2H24's cost ratio of ~68%.
- XRO's ex-US sales grew 23% in FY24, which is crucial for their competitive strategy against Quickbooks.
- Expected continued dominance in the AU/NZ markets through price increases, product bundling, and an expanded product range.
- Endeavor Asset Management continues to hold due to these positive indicators and growth potential.
Blackwattle Investment Partners
30 May 2024
$134.03
- Xero was the largest positive contributor to performance during the month.
- XRO rose 11% in May, on the back of a very strong FY24 result and solid outlook.
- XRO is a market-leading, global accounting SaaS platform.
- XRO’s FY24 result showcased the benefits of the cultural change brought in by CEO Sukhinder Singh-Cassidy in early 2023.
- Balanced top-line growth with profitability demonstrated in FY24 results.
- XRO delivered a record EBITDA margin of 31% and free cash flow growth of over 280%.
- Significantly beat market expectations with FY24 results.
- This result has cemented our view of XRO being one of the highest quality companies on the ASX.
- Blackwattle Investment Partners continues to see significant upside for XRO.
- XRO is on a journey to being the market-leading global accounting software for SMEs.
- Expecting strong financial metrics to continue.
Endeavor Asset Management
28 Feb 2024
$127.00
- Xero Ltd (ASX:XRO) saw a 15% increase in February.
- Endeavor Asset Management originally invested at $62 per share in March 2020.
- Exited investment at $95 per share in September 2020, re-invested at $72 per share in February 2023.
- Endeavor continues to hold their position with occasional sales for portfolio management.
- Long-term conviction based on sticky, high-quality recurring revenue leading to sustainable free cash flow (FCF).
- FY23 marked a significant inflection point as FCF rose to ~$121 million from $12 million in FY22.
- Consensus estimates project FCF to grow to ~$226 million in FY24, with a CAGR of 28% projected to reach $459 million by FY27.
- Xero introduced its '3x3 Strategy' during its inaugural investor day, focusing on core offerings in Australia, UK, and USA.
- Plans to develop adjacent revenue streams in these core markets while aiming for profitable growth in non-core markets.
- Significant investments have been made into enhancing the senior leadership team.
- Xero is advancing artificial intelligence with GenAI for both internal and customer-facing applications.
- FY24 operating expense guidance set at ~75% of operating revenue, with expectations of a lower rate in 2H24.
Please note: The completeness, accuracy or current status of the investments referenced are not guaranteed.