Here’s why the Xero (ASX:XRO) share price could be a buy

There are quite a few reasons why the Xero Limited (ASX:XRO) share price could be such a good one to consider for the long-term.

| More on:
Two people having a meeting using a laptop and tablet to discuss Seven West Media's balance sheet

Image source: Getty Images

The Xero Limited (ASX: XRO) share price could be a really good one for long-term investors to consider.

It’s certainly not cheap after an increase of 89% over the last year. Xero has been a strong performer since the onset of the COVID-19 pandemic and all the associated impacts.

The business has been very effective at growing in its local markets of New Zealand and Australia. Now it’s taking on the world.

Xero still has a very promising growth-focused future and the Xero share price could still represent good long-term value today:

International subscriber growth

There not many ASX shares that have been able to expand overseas very effectively. There have been some painful expansion attempts from Wesfarmers Ltd (ASX: WES), Insurance Australia Group Ltd (ASX: IAG) and Slater & Gordon Limited (ASX: SGH).

But Xero is doing it the right way with fast growth of its international subscriber base. The diversification of earnings is useful and it will allow Xero to invest more into those regions as they become more important to the overall business.

Xero’s most important market is Australia, which now has over 1 million subscribers. The ATO single touch payroll initiative and the roll-out of jobkeeper stimulus payments by the Australian Government contributed to strong demand for Xero.

Other regions are also displaying attractive double digit growth. In the FY21 half-year result, UK subscribers grew 19% to 638,000 subscribers, with revenue rising 33%.

North American subscribers increased 17% to 251,000 and the rest of the world subscribers went up 37% to 136,000 with good growth in South Africa and Singapore.

Expanding product offering

Xero is heavily investing in its product offering for clients. Not only does it have its own development teams to make the technology even better, but it’s also acquiring other businesses to offer to its subscribers.

The most recent acquisitions are called Tickstar and Planday.

Tickstar is an e-invoicing infrastructure business that enables organisations to connect to a global e-invoicing network. Xero said that Tickstar technology will enable customers in Australia, New Zealand and Singapore to have access to faster and more secure transactions. It’s based in Sweden and already serves customers in a number of markets around the world.

The other acquisition is called Planday, which is a leading workforce management platform with more than 350,000 employee users across Europe and the UK. It integrates with Xero, other accounting solutions and third party workforce-related apps to deliver a real-time view of staffing needs and payroll costs. Planday can provide insights that help adjust staffing levels to match trading conditions and control labour costs.

As Xero expands and improves its product offering, it should be able to attract and retain subscribers.

Very scalable

Xero is still heavily investing for growth, which should lead to good outcomes over many years.

The FY21 first half result for the six months ending 30 September 2020 showed how profitable Xero can be if it were trying to control its costs.

HY21 operating revenue increased 21%, or NZ$71,179,000, to NZ$410 million. Xero has a very high gross profit margin of 85.7%, which can help profit increase quickly.

Earnings before interest, tax, depreciation and amortisation (EBITDA) rose by 86%, or NZ$55,915,000, to NZ$120.8 million. Net profit after tax (NPAT) increased NZ$33,150,000 to NZ$35.5 million and free cash flow went up NZ$49,439,000 to NZ$54.3 million.

The improvement of those profit measures are strong, at a high margin. That could be very attractive if it’s a sign of what Xero can deliver in the future when it’s not investing so heavily.

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the five best ASX stocks for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now.

*Returns as of August 16th 2021

Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Xero. The Motley Fool Australia owns shares of Wesfarmers Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Technology Shares