The Xero Limited (ASX: XRO) share price went up another 1.2% yesterday and it's now comfortably above $80, is it still a buy?
Xero's share price started the week under $80 and it has since risen another 3.4%. Can it keep going? Its performance has been very impressive over the past year with the share price doubling.
Everyone is looking for shares that are delivering solid growth. Xero is certainly one of those businesses. In the FY20 half year result it grew operating revenue by 32% and subscribers increased by 30%.
Perhaps the most impressive growth number was that earnings before interest, tax, depreciation and amortisation (EBITDA) excluding impairments jumped by 91% to NZ$65.9 million. This shows that Xero's high gross profit margin (which increased to 85.2% from 82.8%) is helping a lot of the new revenue fall to the EBITDA profit line.
It's very exciting when you can see a business growing revenue at a fast pace and that business has high profit margins and a high retention rate. In this type of situation it's easier to calculate what type of money the business will be making in five or so years if it keeps growing.
I think Xero is actually a pretty defensive business because everyone needs accounting software to help them track their business, prepare financials, lodge their tax return and save time.
At some point Xero's growth rate is going to slow, so it's not always going to be valued at the revenue multiple that it is today. But that time could be some way off.
Like Amazon, it's hard to say what the right price for Xero is because it's investing so heavily in the business. If it just stopped investing today it would be pretty profitable, but Xero management still feel that there's plenty it can put the money towards which will grow shareholder value.
Foolish takeaway
Xero now has a market capitalisation above $11 billion, it may soon be worth more than many of Australia's popular large blue chips. I wouldn't want to buy a large amount of shares today because it has a lot of positivity priced into the value, but it has been a mistake to ignore Xero thus far.
