There are some truly wonderful S&P/ASX 200 Index (ASX: XJO) shares that investors can buy. Over time, there's a good chance that the best businesses will deliver stronger returns, as we've already seen in the past decade.
In my view, businesses that have an excellent product/service with good economics are likely to continue winning over time.
In the next five years, I think the below two businesses could be among the best performers of the current names in the ASX 200 Index. I'd happily invest $2,000 between them.
Let's get into why that's my belief with these ASX 200 shares.
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Xero Ltd (ASX: XRO)
Xero, an accounting software business, has done an incredible job at growing its subscriber number to more than 4 million, with a sizeable presence in numerous countries including Australia, New Zealand, the UK, South Africa, Singapore, the US and Canada.
The world is becoming more digital. This includes tax authorities wanting more lodgements done so in a timely fashion, and increasingly requiring them to be completed online. This provides a strong tailwind for ongoing adoption of Xero's software by small and medium businesses.
For me, the most important thing to see with a software business is growing margins. It costs the business very little to sell one more piece of software to a new subscriber, allowing the the gross profit margin to be close to 90%.
The FY26 half-year result showed a number of positives for the ASX 200 share. Revenue grew 20%, net profit rose 42% and free cash flow surged 54%.
In five years, I believe the business will be significantly more profitable, justifying a substantially higher Xero share price than it currently trades at today.
Broker UBS forecasts that in FY30 Xero could generate net profit of NZ$1.1 billion. I think that is an exciting prospect for long-term shareholders, with the operating profit (EBIT) margin expected to reach 26.6% in FY30 (up from a projected 13.4% in FY26).
TechnologyOne Ltd (ASX: TNE)
TechnologyOne is another software business that has impressive growth characteristics with international growth ambitions.
It provides enterprise resource planning (ERP) software for businesses, universities, councils and governments.
I like the defensive nature of TechnologyOne's client base – they need the software for their operations and the client base is collectively very loyal. The company has worked hard at providing improvements to its software for clients, which also enables the ASX 200 share to generate more revenue from its clients.
A key driver of its underlying value is the net revenue retention (NRR) – this is how much revenue is generated from its existing client base from last year. TechnologyOne aims for a NRR of 115% each year, which means revenue can double every five years.
With the company targeting the UK as another growth centre, as well expectations of an overall rising profit before tax (PBT) margin over time, I think the software company has a very promising outlook for shareholder returns.
The forecast from UBS suggests the business could generate $340 million of net profit in FY30, up from a projected $163 million in FY26.
