Finding the Next Xero

In saying that, we discuss a few interesting up and coming NZ Tech companies below – as we are all looking for the “next Xero”. Kiwis are often regarded as relatively risk averse, which has seen several tech start ups prefer to list on the ASX where there has generally been greater appetite for the risk associated with early stage tech investments.

While it is good to see some more tech names on the NZ market, technology is still an underrepresented sector by global standards – technology stocks make up about 1% of the NZX 50, while accounting for 15% - 20% of the US stock market capitalisation (depending on which market index you refer to).

Behind the success of a number of tech stocks in recent times – think Xero and WiseTech Global on the ASX, is the software as a service (SaaS) business model. The model is called software-as-a-service as it delivers a cloud-based service (such as an online accounting platform) that users can subscribe to in return for a monthly/periodic fee.

For SaaS providers, the business model has several advantages over the business models of traditional companies.

Probably the biggest advantage is the recurring revenue model, whereby once a customer is signed-up they pay the SaaS provider indefinitely to use the service, without the provider incurring much in the way of additional costs in the future or cost of goods sold. This makes the model hugely scalable, with customer growth (and retention rates) being key drivers of success.

Businesses like Xero are highly criticized as they are not “profitable” and often trade on large multiples. However, what some investors miss is the cash burn by Xero in its early stages is to drive customer growth and build scale. While Xero is now profitable from an operating cash flow perspective, at any point in time Xero could have cut back its marketing & expansion spend and delivered a profit to shareholders – although this step limits growth and so is not the best way for a SaaS business to maximise shareholder value.

Moving to some interesting NZX tech stocks. Church payments business Pushpay is interesting as a SaaS business growing in scale. Pushpay has been delivering significant revenue growth as faith institutions in the United States rapidly adopt their product (which is a more efficient system for collecting church donations than the traditional method of passing around a collection plate). The company operates with significant fundamental tailwinds as societal mobile adoption becomes entrenched and economies accelerate toward a cashless society. Pushpay is quickly becoming a significant player in a niche market that until recently has been underappreciated in terms of size and scale. Pushpay has a market cap of just over $1 billion and its shares are up 124% over the last 2 years.

Other NZX tech stocks to watch include; Vista Group – who provide software, digital or online solutions to the global film industry, and Serko – who provide a SaaS solution for business travel & expense management.

It is great to see these up and coming businesses adding diversity to the NZ market, which is dominated by “boring” power generators & utilities.

Hamesh Sharma is a portfolio manager at Pathfinder Asset Management, a boutique responsible investment fund manager. This commentary is not personalised investment advice - seek investment advice from an Authorised Financial Adviser before making investment decisions.