Why this could be the best ASX 200 tech stock to buy in May

Goldman Sachs thinks this could be the best tech stock to buy right now.

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If you have room for an ASX 200 tech stock in your portfolio this month, then it could be worth considering Xero Ltd (ASX: XRO).

That's the view of analysts at Goldman Sachs, which have the cloud accounting platform provider's shares on their conviction list again this month.

What is the broker saying about this ASX 200 tech stock?

Goldman has become even more bullish on Xero this week after the company announced changes to its Australian subscription plans. Commenting on the changes, the broker said:

Xero announced changes to its Australian plans: (1) streamlining the product ladder with less plans and greater segmentation between plans (i.e. removing some features/add-ons from entry level); and (2) introducing +8-9% price rises on its Starter/Standard plans and +0-14% on its Ultimate plans. These changes are being introduced from July 1 2024 (vs. September 12th in pcp) to align with financial year-end, but will result in FY25 having an additional c.2 month pricing benefit. Migration of legacy plans is expected to be completed by March 2025.

Is this good news?

The broker was pleased with the changes and described them as "a clear positive for Xero." It also highlights that "it is consistent with the strategy outlined at the 3×3 Investor Day, where a greater focus on customer segmentation and regionalization was discussed, along with simplifying their offering to ensure customers are using the most appropriate plan for their business complexity."

And while the broker suspects that there will be some subscriber churn because of these changes, it believes the overall impact will boost the ASX 200 tech stock's sales and earnings. As a result, its analysts "revise XRO FY25-26 revenue +2-3% and EBITDA +3%, reflecting stronger ANZ ARPU."

Big returns potential

In response to the above, Goldman has reiterated its conviction buy rating and lifted its price target to $156.00.

Based on the current Xero share price of $123.63, this implies a potential upside of 20% for investors over the next 12 months.

Commenting on its recommendation, the broker adds:

We see Xero as very well-placed to take advantage of the digitisation of SMBs globally, driven by compelling efficiency benefits and regulatory tailwinds, with >100mn SMBs worldwide representing a >NZ$100bn TAM. Given the company's pivot to profitable growth and corresponding faster earnings ramp, we see an attractive entry point into a global growth story with Xero our preferred large-cap technology name in ANZ – we are Buy rated (on CL).

Motley Fool contributor James Mickleboro has positions in Xero. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs Group and Xero. The Motley Fool Australia has positions in and has recommended Xero. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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