The Xero Ltd (ASX: XRO) share price has been one of the hardest-hit within the S&P/ASX 200 Index (ASX: XJO) in the last six months, with the ASX tech share down by 40% over that time. When a strong business falls that far, it could be a clear opportunity.
The cloud accounting provider may have continued to deliver subscriber, revenue, net profit and cash flow growth, but it hasn't been enough to excite the market.
The broker UBS has looked over Xero shares and decided how much the business could deliver in returns over the next 12 months. Let's take a look at what UBS is seeing and the potential growth the business could deliver.
Growth outlook intact
UBS says that it remains positive on the medium term growth outlook and believes the current Xero share price is trading at an "attractive buying opportunity".
The broker notes that the core accounting business continues to see strong growth in the mid-to-high-teens, which is being driven by good growth of both subscribers and average revenue per user (ARPU). The ARPU is being driven by price increases and product mix.
For the next three years, UBS forecasts a compound annual growth rate (CAGR) of 22% for revenue and 37% for operating profit (EBITDA).
UBS believes that UK growth will be spurred by the third phase of 'making tax digital', while Australia could see "new use cases" that help growth. The broker believes ARPU growth will be supported by annual price rises along with higher product attachments (such as payments which grew 35% year-over-year).
What about the US?
The United States is a huge market if the company can get that right. Not too long ago, Xero acquired a US payments business called Melio.
UBS believes the market remains "cautious" on Melio as operating profit (EBITDA) losses were largely flat despite revenue growth of 68%, which was well ahead of expectations. The broker does believe there is a pathway to profitability by FY29 on an EBITDA basis, thanks to a CAGR for revenue of 53% partly due to an improving rate of subscriber additions.
The broker also thinks Melio could see growth in transaction revenue margins from 51 basis points (0.51%) to 58 basis points (0.58%) by FY28.
UBS then said:
We assume Melio achieves EBITDA breakeven by FY29e (prev FY30e), from an acceleration in top-line growth. We also remain conservative on potential upside from cross-sell between Melio and XRO. Management has communicated Melio Billpay will be available inside XRO from Dec-25 onwards along with Gusto payroll which is now in beta, which could drive potential upside to our conservative forecasts for avg +55k US Core accounting net adds over the next 3 years.
Xero share price target
UBS currently has a price target of $194 on the business. That implies a possible rise of just over 70%, if the broker ends up being right.
