Why Xero could be one the best shares to buy in the Asia-Pacific

Goldman Sachs thinks very highly of this tech stock.

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Goldman Sachs is one of the most highly respected investment banks out there.

Its analysts scour the globe for investment opportunities and then recommend them to investors.

While the broker has buy ratings on a number of ASX shares, it has a coveted list that is only for the crème de la crème.

That list is Goldman's conviction list. In the Asia-Pacific region it currently contains 29 companies, with only four coming from the Australian share market.

One of those is cloud accounting platform provider Xero Ltd (ASX: XRO).

Why are Xero shares among the best in the Asia-Pacific region?

Goldman is feeling positive on the company due partly to its strong performance in FY 2024. The broker said:

Xero reported FY24 Sales/EBITDA +0.3%/+10% vs. GSe, while FY25 operating expense to revenue is expected to be 73% in FY25, in-line with GSe prior 72.6%. 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.

But the real reason to be positive is the company's long-term outlook and huge market opportunity. Goldman highlights that with 4.16 million subscribers, Xero is only really scratching at the surface of its addressable market. This gives it a multi-decade runway for growth at a time when small businesses are digitising. It explains:

Xero is a Global Cloud Accounting SaaS player, with existing focuses in ANZ, UK, North American and SE Asian markets. 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 – the stock is Buy rated.

Big return potential

According to the note, the broker currently has a conviction buy rating and $164.00 price target on Xero's shares.

Based on its current share price of $130.94, this implies potential upside of 25.5% for investors over the next 12 months.

To put that in context, a $10,000 investment would turn into approximately $12,500 if Goldman is on the money with its recommendation.

All in all, it believes this makes Xero one of the best investment options in the whole Asia-Pacific region.

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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