The share price of Xero Limited (ASX: XRO) has gone up nearly 100% over the past year, up from $40 to almost $80.
It would only take a gain of 25% from here to reach $100 – that wouldn't be too difficult with how fast Xero is growing.
In the recent half year result it reported that subscribers had increased by 30% to 2.06 million, the amount of net subscribers accelerated (up 24%) to 239,000 and annualised monthly recurring revenue jumped 30% to NZ$764 million.
Perhaps most impressively, earnings before interest before interest, tax, depreciation and amortisation (EBITDA) excluding impairments shot 91% higher to NZ$65.9 million. EBITDA growth was supported by a 2.4% increased of the gross margin percentage to 85.2%.
If Xero's valuation stays at the same ratio of market cap to annualised monthly recurring revenue (or perhaps a slightly lower ratio) then 2020 could easily see the Xero share price rise to above $100.
Xero management have stated that the cloud accounting business is going to keep investing for more growth than trying to grow profit. Like Amazon, I think it makes sense to invest for more growth if it's a good choice for the long-term. With the lifetime value of a subscriber increasing and that revenue at such a high gross margin, it definitely makes sense to try to win as many new subscribers as possible.
To me it seems like Xero is making all of the right moves to offer the best product possible for subscribers in the US and UK such as making key agreements and acquisitions to be able to prepare the appropriate payroll and tax returns to suit local requirements. Accountants and bookkeepers would prefer being able to go from A to Z with a process on one accounting system.
Foolish takeaway
It's quite hard to value Xero when it's deliberately trying to remain close to cashflow breakeven. I think Xero is the most likely tech business on the ASX to reach a market cap of $100 billion, but there's a long way to go. I'd only want to make a small investment at this valuation, but I think it's one of the best businesses on the ASX so it's worth having a piece.
