Xero as a long-term investment

We are invested in Xero (XRO), the global cloud accounting software company. They announced their financial result in May 2020, and reported continued growth in their business, but highlighted the uncertainty caused by COVID-19. As the preferred cloud accounting software provider to small and medium enterprises, we think that there is risk to the short-term outlook given the pressures felt by many business owners due to COVID-19 and the imposed lockdowns. Although we decreased our exposure to the company, it continues to be an important position as we believe that the company has a number of sustainable, long-term competitive advantages.

We think the most interesting and valuable advantage the company has over others is the data and insight they have on each subscriber. This information helps them create products and services tailored to their customers. Given they already have a highly engaged customer base paying for the business critical accounting feature, they are able to offer those new, high-utility products often at a very high profit margin. We think that in the foreseeable future, there may be an entirely new business unit focused on finance, payroll or even an app store that can be as big as the current accounting business. XRO shares are likely to trade in line with subscriber growth, and as long-term shareholders, we are more focused on the long-term value creation opportunities like the one discussed above.

This note has been prepared by ELM Responsible Investments (‘ELMRI’) ABN 70 607 177 711 AFSL 520428, for Australian wholesale clients for the purposes of section 761G of the Corporations Act 2001 (Cth).

The information is not intended for general distribution or publication and must be retained in a confidential manner. Information contained herein consists of confidential proprietary information constituting the sole property of ELMRI and its investment activities; its use is restricted accordingly.

This note is for general informational purposes only and does not purport to be comprehensive or to give advice. The views expressed are the views of the writer at the time of preparation and presenting and all forecasts, assumptions, opinions, data and other information are not warranted as to accuracy or completeness and are subject to change without notice. This is not an offer document and does not constitute an offer or invitation of investment recommendation to distribute or purchase securities, shares, units or other interests to enter into an investment agreement. No person should rely on the content and/or act on the basis of any material contained in this note. Any potential investor should consider their own circumstances and seek professional advice.

ELMRI funds, its directors, employees, representatives and associates may have an interest in the named securities.

Past performance is for illustrative purposes only and is not indicative of future performance.