3 reasons why the Xero (ASX:XRO) share price could be a high-quality buy

Xero shares could be a high-quality pick to consider.

| More on:
woman touching digital screen stating fintech

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Xero Limited (ASX: XRO) share price could be a top contender to consider for growth investment portfolios right now.

Xero has a claim to be one of the leading cloud accounting software businesses in the world. It already has strong market positions in New Zealand, Australia and the UK as it wins more subscribers in those areas. The business also has rapidly growing numbers in countries like South Africa and Singapore.

The business has a number of different compelling reasons to consider it. Here are three factors to like the business:

Cheaper price

If investors are considering a particular business, then a cheaper price is more attractive than an expensive one.

Since 1 November 2021, the Xero share price has dropped more than 8%. That's materially cheaper for the business for people to get a slice of. The lower price may not be there forever if Xero continues to increase in size.

At the moment, Xero shares are rated as a buy by Citi, with a price target of $160. A price target is where the broker thinks the share price will be trading in a year from now. That implies the broker thinks that the Xero share price could go up more than 10% over the next year.

Software as a service (SaaS) economics

SaaS is simply where a tech business is providing a service, usually with a recurring monthly or annual model. That can be useful for customer retention, predictable cashflow and higher profit margins.

Xero has a very high gross profit margin of 87.1%. It was 85.7% in the first half of FY21 and 82.8% in the first half of FY19. Customer churn is very low and is going lower – in the first half of FY22 it was 0.88%.

The increasing average revenue per user (ARPU) and lowering churn is helping increase the lifetime value (LTV) of its total subscriber base. In HY22, Xero said it added $3.8 billion to its LTV to $9.9 billion.

Xero's annualised monthly recurring revenue climbed another 29% to NZ$1.13 billion during HY22, which may give a rough guide of what the next 12 months of revenue may be if it didn't gain any more subscribers.

Global platform ecosystem

One of the main features of Xero is that it enables small and medium businesses to access a range of additional applications and services. This makes the overall Xero offering more useful and valuable to those subscribers. This could be helpful for the Xero share price in the long run.

Platform revenue is becoming an increasingly important part of the picture. In HY22, platform revenue made up 11% of the total NZ$506 million revenue – this was after 104% year or year growth, or 37% growth excluding acquired businesses. Accounting software revenue increased 18% year on year in the same time period.

The Xero App Store is the next focus as it moves towards a more commercial model.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and has recommended Xero. The Motley Fool Australia owns shares of and has recommended Xero. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Technology Shares

A young woman lifts her red glasses with one hand as she takes a closer look at news about interest rates rising and one expert's surprising recommendation as to which ASX shares to buy
Technology Shares

WiseTech share price higher on big news

This tech stock has found its new leader.

Read more »

Man holding a calculator with Australian dollar notes, symbolising dividends.
Technology Shares

$10,000 invested in DroneShield shares 5 years ago is now worth…

You might be laughing all the way to the bank if you had done this.

Read more »

Happy woman working on a laptop.
Technology Shares

Up 60% since April, why this $40 billion ASX 200 tech stock remains a 'compelling buy' today

A leading expert believes this $40 billion ASX 200 tech stock has a lengthy growth runway ahead of it yet.

Read more »

A man holds his head in his hands, despairing at the bad result he's reading on his computer.
Technology Shares

DroneShield shares sink 7% despite big news

Let's see what's going on with this market darling on Thursday.

Read more »

A man activates an arrow shooting up into a cloud sign on his iPad.
Technology Shares

Up 25% since April, is it too late to buy Xero shares today?

A leading expert gives his verdict on the growth outlook for Xero shares.

Read more »

Man looking at digital holograms of graphs, charts, and data.
Technology Shares

2 amazing ASX tech shares I wish I'd bought last year

These tech companies are among the world’s best companies.

Read more »

A man in a business suit and tie places three wooden blocks with the numbers 1, 2, and 3 on them on top of each other.
Broker Notes

3 reasons to buy this booming ASX All Ords tech stock today

A leading broker forecasts more gains to come from this surging ASX All Ords tech stock.

Read more »

Man ponders a receipt as he looks at his laptop.
Technology Shares

Brokers rerate 3 leading ASX 200 tech stocks

Experts reveal their ratings on the ASX 200 tech sector's three biggest companies.

Read more »