What are analysts saying about Xero shares following its blockbuster results?

Here's what Goldman Sachs is saying about this tech stock after it delivered a very strong result.

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Xero Ltd (ASX: XRO) shares certainly were in fine form on Thursday.

The cloud accounting platform provider's shares ended the day almost 9% higher at $134.84.

This compares favourably to a 0.45% decline by the ASX 200 index.

Why did Xero shares rocket?

Investors were scrambling to buy the company's shares after being impressed with its FY 2024 results.

For the 12 months ended 31 March, Xero reported a 22% increase in operating revenue to NZ$1.71 billion. This was driven by a 419,000 increase in subscribers to 4.16 million and a 14% lift in average revenue per user to NZ$39.29.

At the end of the period, the company's annualised monthly recurring revenue reached almost NZ$2 billion, which is up 26% year on year.

Also increasing strongly were Xero's earnings. Its adjusted EBITDA jumped 75% to NZ$526.5 million and its net profit swung from a loss of NZ$133.5 million to positive NZ$174.6 million.

Also catching the eye was the company's free cash flow generation. Xero's free cash flow was NZ$342.1 million for the 12 months. This is more than triple the NZ$102.3 million the company recorded in FY 2023.

Broker reaction

Analysts at Goldman Sachs were impressed with the result and appear to feel vindicated for having Xero shares on their conviction list.

Commenting on the company's results, the broker said:

Key positives: (1) Rule of 40 exceeded (41%) and record EBIT margins delivered (2H24 of 21% vs. 10% in 1H24, 8% 2H23) as XRO benefits from strong revenue growth, cost controls and much lower than expected capex. However we do note some delayed product investment and associated CAC contributed to the lower than expected expense ratio (i.e. 73% vs. c.75% guidance that was re-iterated in February); (2) Revenue trends into FY25 are much stronger than anticipated, given better exit-ARPUs, particularly in the International segment. (3) Subscriber growth in the key UK (+17k) & NA (+3k) markets was stronger than GSe.

In light of the above, its analysts have reiterated their conviction buy rating and lifted their price target to $164.00. Based on the current Xero share price of $134.84, this implies potential upside of almost 22% for investors over the next 12 months. Goldman concludes:

We revise XRO FY25-26 EBIT +2% to +1%, to reflect a stronger revenue outlook (+4% across FY25-26) partly offset by higher costs (72.9% ratio in FY25). Our 12m TP is +5% to A$164, reflecting earnings and roll-forward to FY26E base-year (multiple reduced to 33X, from 40X). Stay 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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