The Xero Limited (ASX: XRO) share price materially outperformed the S&P/ASX 200 Index (ASX: XJO) during the 12 months to 30 June 2024, rising by 14.7% compared to 7.8% for the index.
Of course, a 12-month period isn't everything. What happens in the coming years is more important than the past because of how investors factor future profit and revenue generation into their valuation models.
Xero is a fast-growing technology business that provides accounting software for business owners and accountants around the world.
The May update from Xero was promising and is the latest evidence to justify a higher Xero share price.
Earnings recap
Xero's financial calendar runs differently from the typical financial year (1 July to 30 June) that individuals and many businesses follow.
The ASX tech share reported its 2024 financial year earnings in May this year for the 12 months to 31 March 2024.
It revealed that total subscribers rose by 11% to 4.16 million, and average revenue per user (ARPU) grew by 14% to $39.29. This helped operating revenue grow by 22% to $1.7 billion, the annualised monthly recurring revenue (AMRR) increased 26% to $1.96 billion, and the total lifetime value of subscribers grew by 16% to $15.5 billion.
Adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) climbed 75% to $526.5 million, operating profit rose $198.4 million to $255.7 million. Net profit after tax (NPAT) grew $288.2 million to $174.6 million and free cash flow improved $239.8 million to $342.1 million.
Xero said it had an opportunity to double the size of its business and deliver high profit margins. In FY25, it expects its total operating expenses as a percentage of revenue to be around 73%.
Outlook for Xero shares in FY25
The broker UBS currently rates Xero shares as a buy with a price target of $156, suggesting a possible rise of around 10% in the next year.
UBS thinks Xero can continue to grow its ARPU over the medium term while waiting for subscriber momentum to reaccelerate. Subscribers in the United Kingdom are expected to accelerate in FY27.
One reason UBS thinks Xero's ARPU will increase is that UK prices will rise between 7% and 10% in September 2024. In May, it was also announced that Australian prices were increasing by 9%.
UBS suggested the ASX tech share could increase prices much more than inflation because of the "stickiness of the Xero product".
UBS has predicted that Xero will generate $2.02 billion in revenue and $240 million in net profit in FY25.
