Growth Focus: Xero Ltd (XRO)

by Patrick Taylor

Date of Data Capture: 6/4/2017


Classification: Enterprise Software

Current Price: $18.39

Market Capitalisation: $2.16B

Forecast Sales Growth: 44.44%

Gross Yield: 0%

Consensus Price Target: $18.05

# Covering Analysts: 6

Premium at Current Price: 2.27%

Price Target Trend: Increasing Flat

Signal Time Frame: Quarterly-Monthly-Weekly

Trend Bias: Up Flat ; Medium-Short

Short-term: Positive
Medium-term: Positive Neutral
Long-term: Positive Neutral

Recommendation: Buy

Focus: Capital Growth

Set up Notes:
• After an extremely aggressive first year in which the stock grew almost 1000% XRO has since fallen sideways within a major consolidation for close to three years from their 2014 peak.
• With performance starting to chase potential now is the time to see if they can continue moving up through resistance and build on the base set up throughout 2016.
• We have good signal correlation and positive multi-timeframe momentum building here as we take aim at major resistance targets around $20 and $24, with old highs towering above at $42.
• Support is good and has some nice structure layered down from $18 to $16 and $14.

Growth Focus: Xero Ltd (XRO)

Our primary focus here is capital gain, we will select our stocks from the ASX top 500 All Ordinaries Index.

Normally we look for a good combination of fundamental and technical strength when focussing on a particular growth stock; choosing to zero-in on robust earnings performance and forecasts, coupled with a high potential technical outlook backed by favourable price action. While this is not quite the same case just yet, we found we could not discount accountancy software company Xero Ltd (XRO) which - even without turning a profit - seems destined to rise above its moniker and add up to something big.

Beginning their charter in 2006, Xero is an online software provider offering personal and small business accounting systems and tools covering transactions, cashbooks, general ledgers, accounts, payrolls, and reporting and management, covering monthly and annual accounts. Holding firm as Australia and New Zealand’s dominant provider of accounting and enterprise software, they are also adding growth in the much larger US, UK markets and carry excellent margins and regular cash flow. We think we can count on them moving forward from this expansionary phase to meet aggressive fundamental forecasts, continue hitting milestones and getting closer to break-even and much higher valuation metrics.

XRO made a dazzling entrance to the market late in 2012 at just over $4 and proceeded to cut a fine figure as prices rose up almost 1000% to reach $43 by early 2014 before their numbers were crunched over the following three years, falling by more than 70% from their peak. The current recovery price-base has been formed by two bounces off $12 support, with the first being mid-2015 and the second in early-2016. Since then we have seen the price break through dynamic resistance around $16 by mid-2016 before moving up to test $20 structural resistance by late 2016. Pricing failed to break through this ceiling and moved down to test $15 structural support once more, with that level holding prices bounced back once again and have since coiled sideways, moving through shorter-termed cycles with momentum building across multiple timeframes.

We see good signal correlation across the major timeframes and these have turned almost universally positive with prices bouncing off dynamic support early in 2017. Add that to Xero’s strong sales growth and fundamental forecasts - and with their landmark one millionth subscriber signing on last month - we think this could be the calm before the storm and this cloud-based service operator could be about to make it rain.


This report was produced by Taylor Securities Pty Ltd, which is a Corporate Authorised Representative (Number 414063) of Bespoke Portfolio Pty Ltd (AFSL 341991). Taylor Securities and Patrick Taylor (Representative number 414064) have made every effort to ensure that the information and material contained in this report is accurate and correct and has been obtained from reliable sources. However, no representation is made about the accuracy or completeness of the information and material and it should not be relied upon as a substitute for the exercise of independent judgment. Except to the extent required by law, Taylor Securities and Patrick Taylor does not accept any liability, including negligence, for any loss or damage arising from the use of, or reliance on, the material contained in this report. This report is for information purposes only and is not intended as an offer or solicitation with respect to the sale or purchase of any securities or financial products. The securities or financial products recommended by Taylor Securities and Patrick Taylor carry no guarantee with respect to return of capital or the market value of those securities or financial products. There are general risks associated with any investment in securities or financial products. Investors should be aware that these risks might result in loss of income and capital invested. Neither Taylor Securities and Patrick Taylor nor any of its associates guarantees the repayment of capital. WARNING: This report is intended to provide general financial product advice only. It has been prepared without having regarded to or taking into account any particular investor’s objectives, financial situation and/or needs. Accordingly, no recipients should rely on any recommendation (whether express or implied) contained in this document without obtaining specific advice from their advisers. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice. Where applicable, investors should obtain a copy of and consider the product disclosure statement for that product (if any) before making any decision.

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