3 reasons why the Xero (ASX:XRO) share price could be a high-quality buy

Xero shares could be a high-quality pick to consider.

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The Xero Limited (ASX: XRO) share price could be a top contender to consider for growth investment portfolios right now.

Xero has a claim to be one of the leading cloud accounting software businesses in the world. It already has strong market positions in New Zealand, Australia and the UK as it wins more subscribers in those areas. The business also has rapidly growing numbers in countries like South Africa and Singapore.

The business has a number of different compelling reasons to consider it. Here are three factors to like the business:

Cheaper price

If investors are considering a particular business, then a cheaper price is more attractive than an expensive one.

Since 1 November 2021, the Xero share price has dropped more than 8%. That’s materially cheaper for the business for people to get a slice of. The lower price may not be there forever if Xero continues to increase in size.

At the moment, Xero shares are rated as a buy by Citi, with a price target of $160. A price target is where the broker thinks the share price will be trading in a year from now. That implies the broker thinks that the Xero share price could go up more than 10% over the next year.

Software as a service (SaaS) economics

SaaS is simply where a tech business is providing a service, usually with a recurring monthly or annual model. That can be useful for customer retention, predictable cashflow and higher profit margins.

Xero has a very high gross profit margin of 87.1%. It was 85.7% in the first half of FY21 and 82.8% in the first half of FY19. Customer churn is very low and is going lower – in the first half of FY22 it was 0.88%.

The increasing average revenue per user (ARPU) and lowering churn is helping increase the lifetime value (LTV) of its total subscriber base. In HY22, Xero said it added $3.8 billion to its LTV to $9.9 billion.

Xero’s annualised monthly recurring revenue climbed another 29% to NZ$1.13 billion during HY22, which may give a rough guide of what the next 12 months of revenue may be if it didn’t gain any more subscribers.

Global platform ecosystem

One of the main features of Xero is that it enables small and medium businesses to access a range of additional applications and services. This makes the overall Xero offering more useful and valuable to those subscribers. This could be helpful for the Xero share price in the long run.

Platform revenue is becoming an increasingly important part of the picture. In HY22, platform revenue made up 11% of the total NZ$506 million revenue – this was after 104% year or year growth, or 37% growth excluding acquired businesses. Accounting software revenue increased 18% year on year in the same time period.

The Xero App Store is the next focus as it moves towards a more commercial model.

Should you invest $1,000 in Xero right now?

Before you consider Xero, you'll want to hear this.

Motley Fool Investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and Xero wasn't one of them.

The online investing service he’s run for over a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.* And right now, Scott thinks there are 5 stocks that are better buys.

*Returns as of January 13th 2022

Motley Fool contributor 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 and has recommended Xero. The Motley Fool Australia owns shares of and has recommended Xero. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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