Market darling Xero is expected to enjoy a strong year with global investment bank RBC Capital Markets nominating the accounting software provider as the only Australian listed company to make its top 30 global trades list for 2020.
Xero, headed by former Apple, IBM and Microsoft employee Steve Vamos, posted a stellar 2019 with its shares soaring 90.4 per cent, putting it among the top performers on the broader S&P/ASX 200 Index.
“The interesting thing about our business is it requires a real commitment to building those partnerships with bookkeepers and accountants,” he said. “It takes time for our business model to develop.”
RBC has an outperform rating on the stock with a 12-month price target of $90 per share, a level that would see it breeze past the record level of $84.45 hit late last year.
The investment firm’s Sydney-based analyst Garry Sherriff believes the software provider has several factors working in its favour compared to its rivals.
“Xero is the only global accounting software player built in the cloud as a SaaS [software as a service] platform since inception for small-medium enterprises. This gives Xero material global scalability advantages versus competitors who started life as desktop or on-premise software packages,” Mr Sherriff told clients.
“Xero doesn’t face the complexities of a hybrid solution or transitioning core offerings to the cloud, unlike peers,” he said.
Already a dominant player in Australia and New Zealand, RBC expects its presence in both countries will grow in the years ahead. It forecasts Xero’s Australian market share will double to about 65 per cent by 2025 and New Zealand to be even higher at around 75 per cent.
Mr Sherriff doesn’t expect the company’s growth will be limited to its established markets.
“Xero is quickly gaining share in the UK with its core competitor Sage struggling with difficulties transitioning to cloud, platform outages, churn and management changes,” he said.
“The UK total addressable market is around two times the size of Australia and New Zealand. We expect Xero to triple its UK share to around 24 per cent by 2025, largely at Sage’s expense.”
RBC also believes the company has the potential to become a top three player in accounting software in the United States, a market it estimates to be 10 times larger than Australia and New Zealand combined.
“We forecast Xero to triple US market share to around 2 per cent by 2025 through investing in product and building brand awareness,” Mr Sherriff said.
RBC is not alone in being bullish on Xero’s long-term prospects. Morgan Stanley recently lifted its price target to $90 per share while retaining an overweight rating.
“We continue to see Xero as a high growth stock,” the investment bank told clients in early December.
“Xero is taking leadership globally, with sticky customers, operational leverage and upside from future platform revenue.”
Morgan Stanley believes the company’s underlying long-term value is “underappreciated by investors”.
“We often get asked whether the business will ever make bottom-line money,” it said, acknowledging that Xero spends more on research and development (R&D) and sales and marketing (S&M) as a percentage of its sales compared with its rivals.
“We believe long term that as Xero scales it will see R&D and S&M on par with accounting software and established global SaaS peers.”
Xero shares closed at $79.72 on Friday.