The ASX tech stock Xero Limited (ASX: XRO) has generated big returns for shareholders. In the past year, it has risen by 50% and in five years it has gone up by 160%.
This company provides cloud accounting software which aims to help business owners, accountants, bookkeepers and financial advisers access and work on a business' financial information.
Its various tools and automated offerings help people save a lot of time. Time is money of course.
Some investors may be thinking that it's too late to invest in Xero stock considering it has risen so much and the market capitalisation is now more than $16 billion.
But, I'm going to say why I don't think it's too late to invest in this ASX tech share.
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Strong revenue growth continues
When revenue is continuing to grow at a good rate, the share price can keep rising.
Investors would have made a mistake a decade ago to avoid businesses like Visa, Mastercard, Microsoft, Alphabet and Apple because their revenue kept growing and that helped drive profit, which has helped send all of their share prices higher over the years.
Xero is still doing very well at growing revenue. There are two main elements of its revenue – how many subscribers it has and how much they are paying.
In the FY24 first half, Xero reported 13% subscriber growth to 3.94 million subscribers and 6% average revenue per user (ARPU) growth to $37.38.
That combination helped operating revenue soar 21% to almost $800 million and the annualised monthly recurring revenue (AMRR) rose 19% to $1.77 billion.
If revenue keeps growing more than 10% per annum for many years then Xero's underlying value could keep increasing strongly.
Excellent margins
There's not much point in growing revenue if it doesn't help improve the bottom line, in my opinion.
Revenue growth for Xero is very valuable because of its high-profit margins – it has a gross profit margin of 87.5% (which rose from 87% in the first half of FY23). That means most of the new revenue can turn into usable profit which Xero can spend on more software development or marketing. Extra revenue and gross profit can also flow to the profitability metrics if the company doesn't spend that money.
Xero stock is benefiting from rapidly growing profit. HY24 adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) rose 65% to $204.5 million, operating profit increased 225% to $67.4 million and free cash flow soared $91 million to $106.7 million.
The intangible nature of software could mean Xero's profit margins continue to rise – where profit rises faster than revenue – which could excite investors even more.
In FY24, the company is targeting an operating expense to operating revenue ratio of around 75%.
AI
Xero is the sort of business that could significantly help subscribers operate more efficiently, assist with better insights and improve their Xero experience, as well as increase the productivity of Xero's teams to help customers faster.
Xero stock has already benefited from its ability to help customers through technology, and this could be the next stage of that assistance.
Foolish takeaway
I think Xero stock is still a buy, with a lot of potential profit growth to come over the next few years as its market share hopefully increases in places like Australia, the UK, South Africa and the US.
