Motley Fool Australia

Why I think the Xero share price is a futureproof buy

xero share price
Source: Xero

Xero Limited (ASX: XRO) as a top ASX growth share is hardly a secret. In fact, the Xero share price has jumped 13.3% higher this year and is up 534.9% in the last 5 years.

Some investors might be wary of Aussie tech shares in the current climate. However, here’s why I think Xero could be a ‘futureproof’ buy.

What does Xero do?

Xero is a New Zealand-based tech company that specialises in accounting software.

It is part of the ‘WAAAX’ group of ASX tech shares alongside the likes of Afterpay Ltd (ASX: APT) and Altium Limited (ASX: ALU).

Xero has steadily grown its business with a number of high-profile small and medium enterprise (SME) clients.

That has catapulted the Xero share price higher and made it one of the top ASX growth shares in recent years.

Why I think the Xero share price could be futureproof

It’s worth noting that I’m not alone in considering Xero a long-term buy.

The Kiwi tech group’s shares currently trade at a price-to-earnings (P/E) ratio of 4,194.5. That means there is a lot of expectation for future growth.

But I think Xero can live up to that expectation. In the short-term, I think the simplicity of Xero’s platform could be a good thing for client retention and acquisition.

The coronavirus pandemic has created headaches for many businesses accounting for the JobKeeper stimulus and other measures.

I think we’ll see demand for Xero products remain high despite some looming headwinds.

With the short-term outlook appearing OK, I’d turn my attention to the future.

I think the Xero share price reflects the fact that there is still huge growth potential.

This could be in the form of an expanded product offering for larger clients or in untapped offshore markets.

The obvious risk is from the competition side of the equation. However, Xero has successfully grown in the past decade and a half despite competition from the KKR-owned MYOB.

Is Xero in the buy zone?

The lofty valuation is a potential red flag for some investors. I think it’s quite clear that Xero is not one for those hunting value.

However, I think Xero has a good product and a strong growth trajectory.

I have no doubt there will be speed bumps along the way. But the strong growth profile protects against long-term value declines.

I’d expect the Kiwi group to continue to innovate in the space and capture additional market share.

Add to that the fact that there’s a large addressable market on offer if Xero can execute its strategy and it seems like a reasonable growth story.

That to me says that the Xero share price could be a futureproof buy as part of a wider diversified portfolio.

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Ken Hall has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Altium. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Xero. The Motley Fool Australia owns shares of AFTERPAY T FPO. 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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