The Xero Ltd (ASX: XRO) share price has soared more than 30% in 2024 to date. This is an impressive performance compared to the rise of less than 9% for the S&P/ASX 200 Index (ASX: XJO).
While I wouldn't expect Xero shares to outperform the index by that much over 2025, I think the tech company still has plenty of growth potential over the long term.
As a global cloud accounting software company, Xero has grown quickly in markets like New Zealand, Australia, and the United Kingdom. Here's why I think the company is a great long-term investment opportunity.
Strong margins
Xero's software is extremely cheap and easy for it to replicate, so adding new subscribers is a simple process. This allows the business to achieve a very high gross profit margin, which is very helpful for the company's other profit margins.
In FY24, Xero reported a gross profit margin of 88.2%, an increase from 87.3%. This indicates that the vast majority of new revenue is turned into gross profit, which the company can then spend on growth activities such as advertising or software development to help its future success.
The rate of its profit growth is very pleasing, in my opinion. In FY24, revenue increased by NZ$313.9 million, adjusted operating profit (EBITDA) grew by NZ$224.9 million, net profit grew by NZ$288.2 million and free cash flow jumped by NZ$239.8 million.
This suggests that future revenue growth will be extremely helpful for the bottom line and free cash flow figures. Investors typically focus on net profit or cash flow, so the growth of these statistics should support the Xero share price.
Ongoing global growth
The company doesn't seem anywhere near finished growing its revenue, in my opinion.
Subscriber numbers continue to lift at an impressive rate. During FY24, total subscribers grew by 11% to 4.16 million. Xero added 205,000 subscribers in Australia, 38,000 subscribers in New Zealand, 107,000 subscribers in the UK, 38,000 subscribers in North America and 31,000 subscribers in the rest of the world.
While its scale continues growing, Xero is also extracting more revenue from its very loyal customer base. In FY24, the business achieved a 14% increase in the average revenue per user to NZ$39.29.
Xero can't necessarily keep ramping up its prices every year, but for now, it's benefiting with little loss of subscriber numbers. During FY24, its retention rate of subscribers was just over 99%, which I'd describe as extremely high.
I think there are strong tailwinds for demand of Xero's offering, with ongoing digitalisation of tax reporting, and the efficiencies unlocked of accounting software.
Improvements in the offering
The company seeks to provide the best business technology platform for current and new subscribers, so investing in its platform is integral to ensuring it remains at the top of its industry.
Xero noted that in FY25, it expected product design and development costs as a percentage of revenue to be higher than in FY24. That sounds like a sizeable investment, considering revenue in dollar terms is likely to increase in FY25 due to the trends mentioned above. I view it as a positive that Xero wants to keep investing.
The company recently announced the acquisition of Syft for up to US$70 million to boost its reporting and insights capability for subscribers.
Delivering a great (and improving) experience for subscribers is key to long-term success for Xero shares, in my opinion. I believe it's concentrating on the right areas to keep winning, which should ultimately help shareholders.
