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Why I think Xero shares are a great long-term buy

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The Xero Limited (ASX: XRO) share price, like basically all other ASX shares, was hit during the early phase of the coronavirus pandemic. However, unlike some other Australian tech shares such WiseTech Global Ltd (ASX: WTC) and Altium Limited (ASX: ALU), it has since regained nearly all of those share price losses.

Over the past 12 months, the Xero share price has risen from $59.09 to now be trading $88.36. The upward trajectory in the Xero share price began in early 2017 when it was below $20. Since then Xero shares have really taken off.

Xero delivered strong recent financial results for the FY 2020 financial year. However, it did warn of uncertainty regarding the impact of the coronavirus pandemic.

So, are Xero shares an attractive buy right now?

Strong recent financial performance

Xero managed to deliver another very strong set of numbers for the 12 months ending 31 March 2020. Revenue increased by 30% to NZ$718.2 million, driven by a 2% increase in average revenue per user. Overall subscribers also grew strongly. They increased by 26% to reach 2.285 million.

Equally important was that Xero’s gross margin market continues to increase. It expanded by 1.6% to a very appealing 85.2%.

Earnings before interest, tax, depreciation and amortisation (EBITDA) grew strongly by 52% to reach NZ$139.17 million. Xero also managed to achieve a full-year net profit for the first time in its history.

All regions grew strongly. This includes its main Australian, UK, North American operations as well as other regions including Singapore, Malaysia and South Africa.

Xero is also fast gaining industry recognition. For example, it was recently recognized as a leader in technology research by IDC’s Vendor Assessment study for 2020. The study covered vendors in the worldwide SaaS and Cloud-Enabled Small Business Finance and Accounting applications markets for 2020.

Are Xero shares a good long-term buy?

The impact of the coronavirus pandemic on Xero up to the end of March seemed modest. However, Xero is yet to update the market on its more recent performance. While there is likely to be some recent impact, more favourable market conditions are looking more likely in the months ahead. Business confidence in Australia and New Zealand is now improving. This should see Xero’s growth getting back to more normal levels.

Despite its share price no longer being ‘technically’ cheap, I believe that Xero still has a significant potential to grow further over the next decade. I, therefore, think it is worthy of adding to your share portfolio. In particular, Xero is moving beyond just being a cloud accounting platform. Small businesses are now turning towards Xero to manage their entire business, not just their finances.

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Phil Harpur owns shares of Altium, WiseTech Global, and Xero. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Altium, WiseTech Global, and Xero. The Motley Fool Australia has no position in any of the stocks mentioned. 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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