At the current Xero Limited (ASX: XRO) share price of around $80, I think Xero looks like a top S&P/ASX 200 Index (ASX: XJO) share idea.
Even at around $90 I think Xero would be a top long-term pick. That would still represent a large decline in 2022, given this ASX 200 share has lost nearly 42% year to date.
There are plenty of ASX tech shares that have compelling business models. But I believe Xero is one of the best.
It's one of the world's leading cloud accounting businesses. Xero has a significant presence in New Zealand, Australia and the United Kingdom. The business is also growing in several other countries including the United States, Canada, Singapore and South Africa.
I believe the Xero share price looks like a good opportunity for a number of reasons.
ASX 200 share with global growth
A company that has a large addressable market gives it a significant potential growth runway. Finding businesses that can deliver many years of compounding growth can be beneficial.
Xero has a particularly large addressable market because it's now in numerous countries. And it's growing its subscriber numbers at an attractive rate.
In FY22, the ASX 200 tech share grew its total subscribers by 19% to 3.3 million. That helped operating revenue rise by 29% to $1.1 billion. It achieved 24% revenue growth, excluding acquisitions.
While I'd need a crystal ball to know how long Xero can grow at a double-digit rate, I think it's a very positive sign that its oldest market – New Zealand – is still growing at a decent rate. In FY22, New Zealand's subscribers grew by 15% to 512,000.
The platform nature of its business model is attractive for different users to connect, in my opinion, including business owners, employees, accountants, external application providers and so on.
I think the global growth will be helpful for the Xero share price over the long term.
Strong SaaS metrics
As a software-as-a-service business (SaaS), Xero receives monthly cash flow from its subscriber base. It has a very high customer retention rate. In FY22, it only lost around 0.9% of its subscribers, meaning it kept more than 99%.
The high level of customer loyalty allows it to implement price increases without losing many customers.
In FY22, the ASX 200 tech share reported that the average revenue per user (ARPU) went up 7% to $31.36. This helped annualised monthly recurring revenue (AMRR) go up 28% to $1.23 billion. Thanks to the low churn, ARPU growth and total subscriber growth, the total lifetime value of subscribers increased by 43% to $10.9 billion.
I think these metrics are very beneficial for the company's long-term prospects as it invests to grow its number of subscribers around the world.
High gross profit margin
Xero had a very high gross profit margin of 87.3% in FY22. This was an increase from 86% in FY21.
This high margin allows Xero to re-invest most of the new revenue back into the business. For example, in FY22 it grew its overall sales and marketing costs by 32% to $405.7 million, which has helped subscriber additions and brand awareness.
Meanwhile, the ASX 200 tech share grew its product design and development expenses by 49% to $372 million. Examples of focus include production localisation in a number of international markets and future innovation areas such as platform, ecosystem and integration of acquisitions.
Xero says that it will continue to focus on growing its global small business platform and maintain a preference for re-investing cash generated to drive long-term shareholder value, which could be helpful for the Xero share price.
