The current Xero Limited (ASX: XRO) share price on offer makes it look like a very attractive S&P/ASX 200 Index (ASX: XJO) stock. I think it could be one of the best to buy today.
There aren't that many ASX shares that have fallen as much as Xero since November 2021 – it's down around 50%. That's despite it rising by just over 10% since the start of the year.
As one of the world's largest cloud accounting businesses, it is indirectly connected to millions of the world's small and medium businesses. An economic downturn could have an impact on Xero's financials.
However, while the Xero share price has sunk 50%, it's not as though revenue has sunk 50%. Or 40%. Or 10%. In fact, the business has continued to grow.
That's one of the key elements to my bullish thoughts on the investment. It has continued to develop, meaning we're simply getting the ASX 200 stock at half the price of what it used to be – the business hasn't suffered a significant decrease in performance.
Growth continues
In the six months to 30 September 2022, total subscribers grew 16% to 3.5 million, average revenue per user (ARPU) rose 13% to $35.30. This helped operating revenue jump 30% to $658.5 million.
The gross profit margin was stable at 87% and free cash flow soared 145% to $15.6 million, despite Xero investing for growth globally. The northern hemisphere is a key focus for growth, with the UK and Canada being two of the markets that Xero is trying to win in.
In the half-year result, we saw the ASX 200 stock's UK revenue rise 32% to $175 million. The company said it expects momentum in subscriber additions in the UK to improve over the rest of FY23.
North America saw revenue increase by 44% to $44 million. It's also expecting momentum in subscriber additions in North America to improve over the rest of FY23.
A long-term focus on growing the ASX 200 stock's scale
When Xero talked about its outlook, it said:
Xero will continue to focus on growing its global small business platform and maintain a preference for reinvesting cash generated, subject to investment criteria and market conditions, to drive long-term shareholder value.
Outgoing CEO Steve Vamos said:
We're focused on delivering the world's most insightful and trusted small business platform by driving cloud accounting adoption, growing the small business platform and building for global scale and innovation. We remain committed to investing for the short and long term opportunity and supporting customer needs while maintaining a disciplined cost focus.
The ASX 200 tech stock is expecting its operating expenses as a percentage of revenue to decline in the longer term, which should lead to higher profit margins for the business.
I think Xero is a very profitable business underneath the expansion expenditure. If it halved its marketing and product development spending then it would make quite a lot of profit. But, it doesn't need to do that.
In my opinion, the business still has a significant growth runway. The world is a big place. I think that's why it's still pursuing growth so heavily.
Over the next five years, I can see the Xero share price doubling thanks to a combination of revenue growth and improving margins, making it a smart investment at the current level.
