3 reasons Xero shares are poised to rise in 2025

This tech stock has a lot going for it, in my view.

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Xero Ltd (ASX: XRO) share price has performed very well in the last 12 months, rising by more than 40%, as the chart below shows. I think there are plenty of reasons why the ASX tech share has ongoing growth potential from here.

Xero provides cloud accounting and business operations software in multiple countries worldwide, including its biggest markets: Australia and New Zealand, the United Kingdom, and the United States.

There's a lot to like about the business, with three key factors that stand out to me.

A smiling businessman in the city looks at his phone and punches the air in celebration of good news.

Image source: Getty Images

Strong revenue and subscriber growth

Xero's growth over the last decade has been spurred by a significant growth in subscribers who are attracted to its simplicity, efficiency tools, and value.

In the first half of FY25f, the company reported a 6% increase in subscribers to 4.19 million, which also included the removal of 160,000 long-idle subscribers.

Looking at the individual regions, Xero added 84,000 subscribers in Australia to reach 2.5 million and 9,000 extra subscribers in New Zealand to reach 614,000. In the UK, it added 49,000 subscribers to reach 1.1 million, 12,000 subscribers in North America to reach 365,000, and 13,000 for the rest of the world to reach 278,000.

This subscriber growth contributed to Xero's HY25 revenue growth of 25% to $996 million.

I think its underlying subscribers and revenue can continue to rise strongly in 2025.

Customer loyalty

Subscribers seem to like what Xero offers because the company had a very high customer retention rate of 99% in the FY25 first-half result. The customer loss rate has been 1% or less for a number of years.

With its highly loyal customer base, Xero has felt confident about passing on price increases for businesses in Australia, New Zealand, and the UK in recent years. This helps boost the average revenue per user (ARPU). In HY25, the ARPU grew by 15% to $43.08, and I think the APRU can rise further over 2025, which could be useful for Xero shares.

This combination of a rising ARPU and an ongoing loyal customer base is boosting the company's total lifetime value of subscribers, which rose 15% to $17 billion in HY25.

Rising profit margins

As a software business, delivering the service to subscribers doesn't cost much. That's why Xero reported a gross profit margin of 88.9% in HY25, which was higher than 87.5% in HY24.

Revenue is rising faster than costs, so the company's margins are growing at a nice pace. This is helping the company's other profit lines rise faster than revenue.

While revenue grew 25%, operating profit (EBITDA) grew 52% to $312 million, net profit after tax (NPAT) rose 76%, and free cash flow jumped 96% to $209 million.

Investors typically value a business based on its profit, so this rapid profit growth could significantly support the Xero share price over 2025 and beyond.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended 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.

More on Technology Shares

Smiling couple looking at a phone at a bargain opportunity.
Technology Shares

3 bargain ASX tech shares I'd buy right now

Tech shares have sold off, but that could be creating opportunities.

Read more »

defence personnel operating and discussing defence technology
Technology Shares

Why EOS shares are tumbling 11% today as investors weigh a key defence catalyst

EOS shares fall 11% as investors await a key contract update.

Read more »

Buy and sell written on a white cube.
Technology Shares

Why this top fundie is tipping Life360 shares for outsized gains

A leading fund manager believes Life360’s beaten-down shares could be set for a large rebound.

Read more »

Robot humanoid using artificial intelligence on a laptop.
Technology Shares

Xero shares push higher on deal with AI giant Anthropic

This tech stock is avoiding the market selloff on Friday.

Read more »

A man sits in despair at his computer with his hands either side of his head, staring into the screen with a pained and anguished look on his face, in a home office setting.
Technology Shares

Why are Weebit Nano shares crashing 15% today?

Let's see why this tech stock is sinking on Friday.

Read more »

A woman scratches her head, thinking is this a no-brainer?
Technology Shares

Down 65%: Are Pro Medicus shares in the buy zone yet?

Pro Medicus has had one of its toughest periods yet...

Read more »

Red arrow going down, symbolising a falling share price.
Technology Shares

Why is this battered ASX tech stock losing big today?

Analysts remain bullish and see 110% upside for the growth share.

Read more »

A dollar sign embedded in ice, indicating a share price freeze or trading halt
Technology Shares

This ASX tech stock is frozen today. Here's what's going on

ASX tech stock enters halt as a capital raising looms.

Read more »