Xero hitches growth upside to strong SME uptake

Having concluded that Xero (ASX: XRO) has been unfairly thrown into the same bus as technology stocks that chase growth at the expense of profit or margin, Ord Minnett has upgraded the cloud-based accounting software platform to Accumulate from Hold.

But in the light of the general sector de-rating, the broker’s target price has reduced to $107 from $130.

Despite precious little news coming out of Xero in recent times, the share price appears to have been dragged into the tough love dished out the tech sector at large, with the share price down around 35% since the start of the 2022.

Fundamentals haven’t changed

Unsurprisingly, this morning Xero announce that the company was axing services in Russia. Prior to today’s news, the last notable update from Xero was the  largely positive set of half-year results in November.

Key takeaways at the half year included:

• Annual recurring revenue is up 29%.

• Subscribers increased 23%.

• Total lifetime value of subscribers up 61%.

However, having invested more back into the business, earnings growth reversed, with earnings down -19%.

At face value, it looks as if the market either didn't like or understand the value of reinvesting virtually all of its cash flow to help deliver bigger future profits.

To expand its offering, Xero has continued to acquire businesses, with recent acquisitions including Planday, Tickstar and Waddle.

Focussing on the growth

Recent share price weakness defies the 'share market darling' status the company has enjoyed, evident in the more than four-fold share price increase in the last five years.

Having parked negative market sentiment to one side, Ord Minnett has, after refocussing on fundamentals, concluded that Xero is in a strong market position in Australia, NZ and the UK, plus early positioning in North America to capture the growth and adoption of cloud accounting software by SMEs.

Despite persistent challenges over the past two years Joseph Lyons, managing director for Australia recently noted that the accounting and bookkeeping sector is poised for growth in 2022.

“Heightened demand for industries like construction and professional services are leading to a boom in small business creation, generating even more demand for skilled advice."

Xero share price: A five year view.