Although the Xero Limited (ASX: XRO) share price is underperforming on Tuesday, it isn’t taking any of the shine off its incredible performance in 2020.
Since the start of the year, the cloud-based business and accounting software platform provider’s shares are up an impressive 82%.
Why is the Xero share price beating the market in 2020?
There have been a number of catalysts for Xero’s strong share price gain in 2020.
One of the main catalysts has been the company’s strong performance during the COVID-19 pandemic.
Despite the disruption that small businesses have faced from the crisis, this hasn’t been able to put a dampener on Xero’s growth. In fact, its subscriber numbers have continued to grow as though there was no pandemic.
During the first half of FY 2021, the company reported a 19% increase in total subscribers to 2.45 million.
This helped underpin a 21% increase in operating revenue to NZ$409.8 million.
And thanks to management’s excellent COVID-related costs control, its profits grew even quicker. For the six months ended 30 September, Xero’s net profit after tax came in 26 times greater than the prior corresponding period at NZ$34.5 million.
Bullish brokers.
This strong operating performance didn’t go unnoticed in the broker community.
While a number of brokers put out bullish notes, one of the most positive brokers was Goldman Sachs. It initiated coverage on Xero with a buy rating and $157.00 price target.
The broker was impressed with its performance and believes it is well placed to continue this strong form for a long time to come.
According to the note, Goldman Sachs is positive on Xero due to the quality of its product, its large and growing total addressable market (TAM), and its attractive unit economics.
Currently, the broker estimates that Xero has a core TAM of NZ$14 billion across its key markets. Based on its FY 2020 results, this means it has only captured 4.6% of its TAM.
While this alone gives it a long runway for growth, Goldman believes its TAM can increase materially in the future by broadening and monetising its app ecosystem and expanding into new geographies.
So much so, if Xero executes its growth plans successfully, the broker expects this to open a further NZ$62 billion in addressable TAM. It feels this provides it with “a multi-decade runway for strong revenue growth.”
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Returns as of 6th October 2020
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James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Xero. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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