The Xero Limited (ASX: XRO) share price was on form last week.
The cloud accounting platform provider's shares rose 9% over the period to end at $116.72.
Why did the Xero share price race higher?
This strong gain appears to have been driven by a strong week for the tech sector on Wall Street and news of upcoming price increases.
Commenting on the price increases, Goldman Sachs said:
Xero today announced a planned price rise for AUS/NZ subscribers from 13-Sep-23, with AUS plans increasing by +A$3-28 (importantly including a 50% increase on the entry level payroll plan from A$10 to A$15) with NZ Plans increasing by +NZ$2-5. This is similar to changes made last year, and in 2021, noting last year's increases (occurring around similar time) drove FY23 ANZ Exit ARPU +7% vs. PcP (CC). We do note that no UK pricing changes appear to be communicated at this stage.
Both Goldman Sachs and Citi believe this is good news for investors and see upside risk to estimates.
For this reason, they have retained their buy ratings and $130 and $120 price targets, respectively, on its shares. The former suggests that the Xero share price could still rise a further 11.5% from here.
What is being said?
Citi estimates that these price increase could boost average revenue per user (ARPU) by 5%. It said:
We estimate that the price increase announced in ANZ increases group ARPU by 5% (assuming 50-50 business edition-partner edition split). While the price increase represents upside to our ARPU forecasts, more importantly it should offset any potential weakness in top-line growth due to slowing macro conditions/potential increase in churn and also speaks about Xero's strong competitive position in ANZ. The lack of a price increase in UK is a surprise, especially given Sage's recent price increase. We maintain our Buy rating on Xero and see upside to the cost-guidance, while the price increase supports top-line growth.
This sentiment was echoed by analysts Goldman Sachs, which were pleasantly surprised by the quantum of the increase. They said:
Although price rises in Xero more mature markets are not entirely unexpected, we are surprised by the quantum of the price rises in ANZ – particularly the +50% increase on the starter plan. This suggests upside risk to our FY24E forecasts for +3% ANZ ARPU Growth. We expect these will support ongoing ARPU expansion for Xero and underpin consensus revenue growth expectations into FY24 (+21% as per Visible Alpha Consensus Data), noting i.e. FY23 AMRR supports +16% growth, half year of c.10% price rises in ANZ is c.3%, + incremental sub growth, + potential International pricing changes. Although there is some risk of elevated churn – this has historically not been the case given the sticky nature of the product, and we note competitors are also raising pricing (Sage in UK). We await further details around UK pricing which is yet to be announced. Remain Buy (on CL).
