Should you buy, hold or sell Xero shares?

With tax time just around the corner, it feels apt to open the books on one company that has disrupted an entire industry through innovation and delivering a superior product to its growing legion of customers.

Xero displaced on-premise incumbents through its cloud-based accounting solutions over a decade ago, and as technological advancements, particularly in artificial intelligence, continue today, we believe Xero possesses the right combination of attributes to deliver both growth and profitability for years to come.

What is Xero's strategy and outlook?

Xero is a global cloud-based platform for small businesses. From humble beginnings in a small apartment in Wellington, to hosting thousands of product users and devotees at their annual Xerocon conference, the company redefined the seemingly sleepy world of accounting software through its feature-rich product offering.

Xero's core product is a cloud-based, single source of truth, accounting ledger with real-time reconciliation that sits between accountants and small-medium-enterprises (SME).

The product streamlines the maintenance of financial records for regulatory and tax purposes.

The adoption of Xero's offering by accountants has created a sticky platform, as this channel drives scale, adds credibility and reduces churn and price competition. Barriers to entry are increasing as platform functionality and ecosystem partners grow.

As cloud accounting penetration increases the natural question becomes, where to from here. Xero has outlined its strategy to focus on its core three markets (ANZ, UK and US) and the core three jobs to be done (Accounting, Payroll and Payments).

Organising around these objectives and increasing local development capacity under the new CEO Sukhinder Singh Cassidy is setting up Xero to experience an increase in product development velocity, reduce friction and increase cross-sell.

How is Xero performing?

With innovation driving Xero's success to date, the market recently questioned the company's ability to continue to do so at attractive rates of return on capital, however we believe the quality of Xero's business model shone brightly in its most recent update.

Xero reported revenue growth up 21%, expanding EBITDA margins, and delivering an impressive 20% free cash flow margin, while signalling further reinvestment into its products.

This was in our opinion driven by several factors. The power of its accounting channel to market, low share of wallet, customer stickiness all increasing its ability to drive price outcomes, while taking cost out of the business with little impact to the top line growth.

While risks remain - in the form of competition from other players in the UK market in particular - we are of the view that Xero can continue to innovate at attractive rates of return, while further honing their competitive advantage.

Should you buy, hold or sell?

As another financial year comes to a close, and accountants are ruling off the books, we look to another strong year ahead for Xero.

As its annualised monthly recurring revenue gives us visibility on revenue growth, and cost guidance appears conservative, we will be looking for further evidence of product velocity and operating efficiency that will drive earnings in FY26 and beyond.

Xero is a great example of what a company can do in a short space of time when it has an outstanding business model and dominant market share. Buy.

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