Analysts upbeat on Xero as it embraces generative AI

Analysts from Goldman Sachs are upbeat about ASX-listed tech company Xero Ltd (ASX XRO), as the online accounting platform makes haste to adopt the latest innovations in artificial intelligence and extend efforts to expand into the US market.

New Zealand develops world-class SaaS platform

Founded in the New Zealand capital of Wellington in 2006, Xero bills itself as a cloud-based provider of accounting software to small-scale businesses. The company's software-as-a-service (SaaS) business model offers its products by means of subscriptions that can be tailored to suit the size and usage needs of individual clients.

The company saw rapid growth in the first decade of its founding, amassing over one million clients internationally by 2017, and more than one million subscribers in the Australian region alone by 2018.

Xero's products currently have users in over 180 countries, in countries including New Zealand, Australia, Singapore, Canada, South Africa, the United Kingdom and Singapore.

Xero has already established itself as a provider of world-class software products with the success of its SAAS business model in developed markets including Australia, the UK and Singapore.

One of the largest potential markets for its services is of course the US, where Xero has spent NZ$30 million a year on expansion campaigns for around a decade. Analysts point out that the future performance of the company's share price could hinge on the success of its efforts to expand further into the North American market.

Thus far, Xero's expansion campaign has achieved limited success. Subscriber numbers in the US stand at around 400,000, as compared to 1 million in the UK and 2.3 million in Australia and New Zealand.

Xero faces major challenges in the US that could impede expansion into the North American market. Chief amongst them perhaps is a highly complex tax code that varies from state to state, alongside the presence of established competitors such as Intuit that are well-versed in the intricacies of the US tax system.

Goldman Sachs upbeat on Xero

Despite the challenges that face Xero in the US market, some analysts remain upbeat about the company's overall prospects.

Analysts from Goldman Sachs have a buy rating for Xero with a $152.00 price target. The brokerage sees Xero's share price potentially rising to as high as $231 in a bullish scenario, if the company manages to overcome roadblocks to success in the US.

According to Goldman analysts, a new management team and recent improvements to its product offerings improve the likelihood of US success.

'[A] Xero bull case of A$231 (+93% implied upside), ascribing A$118 to ANZ/UK, A$72 to the US and A$40 to its transaction businesses,' the brokerage said.

'Given historical challenges in the US, market pricing (A$120) could be implying a strong ANZ/UK performance, stable transaction revenues (i.e., 10.5% revenue), but potentially no value to the US, or improved transaction performance (i.e., greater pay attach).

'Given: (1) increased US focus within the 3×3; (2) improved product capability; (3) refreshed management team, we would view such pricing as overly cautious.'

Xero embraces artificial intelligence

Xero's efforts to improve the products and services its consumers have recently included the adoption of the latest innovations in generative artificial intelligence (AI).

In February, the company announced that it had developed an AI companion called 'Just Ask Xero' (JAX) to complement its SaaS products.

The AI software could have a major impact on the quality of Xero's online services by significantly increasing ease of use for clients.

'Customers will be able to "Just Ask Xero" to complete tasks like generating an invoice either in Xero or other apps such as email or WhatsApp,' Xero said.

'JAX will complete the task and anticipate and propose other tasks that may follow, such as following up overdue payments or crafting emails.'

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