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The Xero share price is up 42% in 12 months: Too late to invest?

On Monday the Xero Limited (ASX: XRO) share price rise 2.5% to finish the day at $41.91.

This gain means the business and accounting software company’s shares have risen a sizeable 42% over the last 12 months.

Is it too late to buy Xero shares?

I don’t believe it is too late to buy Xero shares if you’re willing to hold onto them for the long term.

In the first half of FY 2019 Xero reported a 37% jump in first half revenue to NZ$256.5 million and a 40% lift in its annualised monthly recurring revenue to NZ$589.1 million.

Based on the latter metric, Xero’s shares are currently changing hands at a little over 10.5x sales.

While this is notably higher than the sector average, I believe its strong sales growth and significant global market opportunity justifies the premium.

Especially given the way the company is not only increasing its subscriber numbers but is squeezing more revenue out of each of them.

In the first half the company added 193,000 net subscribers, taking its total to just under 1.6 million, and the average revenue per user (ARPU) metric lifted 6% to NZ$31.10 per month.

What’s next?

Xero continues to generate most of its revenue in the Australia and New Zealand market where it has 981,000 subscribers (62% of total subs).

But in the next few years I would not be at all surprised to see its UK business closing the gap significantly. In the first half the company saw its UK subscriber numbers increase 40% to 355,000, but this is only scratching the surface of a much larger opportunity.

It is a similar story in the massive North American market where the company added 68,000 subscribers to bring its total to 178,000. While it will be no easy feat to become a leader in this market, I believe the overall quality of its product gives it a chance of winning a decent market share, underpinning it long term growth.

Should you invest?

Overall, I think it is clear to see that Xero is one of the best tech companies in the ANZ region and well worth considering along with the likes of Altium Limited (ASX: ALU) and WiseTech Global Ltd (ASX: WTC).

Its shares may have gone gangbusters over the last 12 months, but if it can continue its strong operational performance this year there could be plenty more to come over the next 12 months.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Altium, WiseTech Global, and Xero. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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