The Xero Limited (ASX: XRO) share price and the IRESS Ltd (ASX: IRE) share price have edged higher and higher in 2019.
In 2019, Xero hit lows of $40.02 at the end of January and has since rocketed to $51.31 at the close of business on Thursday. That's a sweet 22% return for investors in just a few months. Similarly, IRESS is up 25% since the new year to $13.58 on Thursday, hitting a peak of $13.70 last Friday.
Here's why I think Xero and IRESS are in the buy zone.
Why Xero?
Xero offers a cloud-based accounting software-as-a-service for small and medium-sized businesses. It's a robust accounting solution with intricate accounting features, detailed reports, unlimited users and has a connected app function which allows for over 700+ integrations across companies like Stripe, PayPal and Deputy. It currently records over $1.5 billion worth of transactions.
The company is capitalising on the growth in cloud accounting, particularly in Australia where this is expected to penetrate 50% of all businesses. In its HY report, 66% of Xero's $256.5 million revenue was from Australia and New Zealand. The company expects that this proportion will fall as penetration in the US and UK markets improve. This will be something to watch in Xero's FY results.
The company has indicated that it intends to shift towards becoming a financial services platform. This has been evident in its product decisions, such as launching its banking API and supporting payroll functions.
These moves indicate Xero's potential to adapt to changing business climates, as well as its dedication to international expansion.
Why IRESS?
IRESS specialises in developing software services for client relationship management all the way through to portfolio tracking for financial advisory and superannuation firms.
The company is investing heavily in building out machine learning and artificial intelligence capabilities to create automated advice solutions. IRESS now has half of its 1,800-technology staff allocated to these projects. It is also preparing for a future where screens will be replaced by voice-based interactions.
Back in February, the company reported solid annual results with group revenue up 8% to $464.6 million and profit up 10% to $137.7 million. This grew the company's EPS by 6% to $37.6 cents at December-end, pushing its P/E ratio to 34x. Furthermore, IRESS has consistently been improving its return on capital from 14% to 15% in the last three years which correlates with a 9% decrease in its debt-to-equity ratio to 49% over five years.
Foolish Takeaway
Based on 2020 earnings, Xero is expected to be trading on a 177x multiple, far ahead of its WAAAX peers. On the other hand, IRESS currently operates at a 36x P/E multiple, nowhere near as expensive as Xero's valuation.
Strong earnings results and the favourable strategic moves for Xero and IRESS are already priced into the underlying valuation. This shows that investors are bullish on future potential growth.
