Is the Xero Ltd share price a buy?

The Xero Limited (ASX: XRO) share price has had an excellent start to 2019. Is it a buy?

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The Xero Limited (ASX: XRO) share price has had an excellent start to 2019. Currently trading at $51.64, the Xero share price has increased by 22.87% in the year to date.

With these gains and the strength of it being one of the most popular cloud-based SaaS providers in the market, I think Xero has a bright future.

What makes Xero shares a buy?

In the first half of this financial year, Xero recorded a 37% increase in operating revenue to NZ$256.5 million. This is no surprise when you consider the strong growth the company had in subscriber numbers throughout 2018.

According to Xero's full-year earnings update in May 2018, the company had 1.386 million subscribers with 351,000 of these joining during FY18. I'll be interested in an update on subscriber numbers in the next full-year earnings update which will be released on 16 May 2019.

Another thing I like about Xero is its focus on becoming a go-to platform for financial services and not just accounting. The company launched its open banking API in late-2018, which gives users access to their bank feeds in Xero in real time. Ultimately, this feature is designed to help business owners make more informed decisions, and drive the company's partnerships with financial institutions.

On the numbers front, Xero is tracking well in terms of revenue growth. The company went from NZ$28.6 million loss in FY17 to positive EBITDA of NZ$26 million in FY18. If this number grows again in the full-year earnings for FY19, I think Xero's share price will continue to push higher.

Foolish takeaway

While Xero doesn't currently pay a dividend, I think the explosive growth of its platform and growing subscriber numbers will continue to strengthen the company.

Xero's core business of providing accounting and small business software means the company provides an essential service to many businesses. As an essential service, it is unlikely a business would cancel its Xero subscription, even in lean times. For that reason, I think Xero could weather an economic downturn quite well.

However, in a risk-off environment, Xero's share price would likely fall as with other technology stocks. If you're investing with a long-term view though, I think the company has a sustainable business model that's delivering an essential service to businesses and that could be a positive addition to your portfolio.

If you're looking for other growth shares, take a look at this small cap growth share that has been rated a buy.

Motley Fool contributor Nicola Smith has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of 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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