It may not feel like a bull market is coming based on how the ASX 200 index is performing today following a sell-off on Wall Street. However, I remain confident that once inflation is under control and interest rates settle, global share markets will take off once again.
In light of this, I recently bought Xero Limited (ASX: XRO) shares.
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Why did I buy this ASX share?
The main reason I bought this ASX share is its valuation. With the Xero share price down 50% since the start of the year, as shown below, I believe it has been oversold and created a wonderful opportunity for patient long-term investors.
Last month, Xero released its half-year results and revealed that its subscribers had grown 16% to 3.5 million despite the tough economic environment.
Together with price increases and foreign exchange tailwinds, this solid subscriber growth underpinned a 31% increase in annualised monthly recurring revenue (AMRR) to NZ$1.5 billion and a 30% lift in total subscriber lifetime value (LTV) to NZ$13 billion.
The latter metric is the important one, in my opinion. Xero has a subscriber LTV of NZ$13 billion but, following its share price weakness this year, a market capitalisation of approximately NZ$11.6 billion.
This is a rare opportunity for investors to be able to buy Xero shares at a discount to the long-term value of the company's subscriber base. This is something that analysts at Morgans recently noted. They commented:
XRO is a high quality cash generative business with impressive customer advocacy and duration. Over the last 12 months rising interest rates and competition have made things harder for Xero. However, we see the current short-term weakness as a rare opportunity to buy a high quality global growth company at a discount to the life time value of its current customer base.
Looking to the future
Another reason why I think this is an ASX share to buy and hold for the long term is the company's huge market opportunity.
Although 3.5 million subscribers is certainly a large number, it pales in comparison to its total addressable market (TAM). This is estimated by management to be about 45 million subscribers globally, which means that it currently has just 7.8% of its TAM.
And while Xero is never going to bring all 45 million potential subscribers to its platform, I believe the quality of its offering means it is possible for it to triple its subscriber base to 10 million in the next decade or so.
Combined with price increases and value-added services from its app store, this has the potential to deliver incredible revenue and earnings growth over the 2020s and 2030s.
All in all, this is why I think Xero is a share to buy before the bull market comes.
