UK boost: Why this ASX tech stock is a strong buy

Some good news out of the UK could has caught the eye of Goldman Sachs.

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Now could be a good time to buy Xero Ltd (ASX: XRO) shares.

That's the view of analysts at Goldman Sachs, which have responded positively to some news from the other side of the world.

Xero's UK boost

Goldman notes that the ASX tech stock has just announced changes to its UK plans. Commenting on the plan changes, the broker said:

Xero announced changes to its UK plans: (1) Increase price by +7% to +12% across its product portfolio effective 12 September 2024, consistent with 2023 changes from a quantum and timing perspective (vs. AU 2 months earlier); (2) Announced improvements in payroll functionality (i.e. greater functionality for salaried employees with flexible working hours; easier to transition to XRO from another provider); (3) Streamlining of plan structure similar to AU (Ignite, Grow and Comprehensive plans), but priced in a manner implying much less upsell opportunity (vs. AU tiers) given plan pricing is similar (or cheaper when including add-ons such as Xero Expense or Payroll); and (4) Migration of legacy plans expected to occur by March 2025 (in-line with AU) which implies a slightly faster migration timeline.

And while the changes were not unexpected, the price increases are a touch greater than it was forecasting. As a result, it sees the move as a positive and supportive of its revenue growth estimates.

In addition, and importantly, the broker doesn't believe these changes will negatively impact subscriber growth. This is because it will allow Xero to make a greater investment in its platform. It adds:

Although we believe this pricing update was somewhat expected following the Australian plan announcement, we view it as another incremental positive for Xero and very supportive of our FY25/26 revenue forecasts. Although some may also see this as a 'pull-forward' of future price rises, and potentially at the expense of subscriber growth, we would disagree, noting that the higher near term revenues as a result of these changes will also allow for greater product investment, underpinning future subscriber/ARPU growth in the UK. We leave our earnings unchanged, forecasting +5.5%/+2% ARPU growth in ANZ/International in FY25 (vs. the FY24 exit run-rate, adjusting for idle-subscribers), with this growth reflecting the significant announced AU/UK price rises.

Big returns expected from this ASX tech stock

In light of the above, the broker has reiterated its conviction buy rating and $164.00 price target on the ASX tech stock.

Based on its current share price of $134.03, this implies potential upside of 22% for investors over the next 12 months.

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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