Why the Xero share price is a buy right now: experts

A woman sits at her computer in deep contemplation with her hand to her chin and seriously considering information she is receiving from the screen of her laptop regarding the Xero share priceA woman sits at her computer in deep contemplation with her hand to her chin and seriously considering information she is receiving from the screen of her laptop regarding the Xero share price

The Xero Limited (ASX: XRO) share price has dropped 35% since the start of 2022. The ASX tech share is seen as an opportunity, according to some experts.

It has been a volatile period for the ASX share market. There is elevated inflation around the world, which is why expectations for rising interest rates are increasing.

That may explain some of the market sentiment on the Xero share price in recent times. But after the decline, some experts believe that the cloud accounting business is worth buying.

Here are some of the factors that are favourable about the company.

High-profit margin with growing SaaS metrics

It is possible for technology companies to achieve relatively high-profit margins because of the intangible nature of what they offer customers. Software can be reproduced easily and cheaply. Furniture, phones, or other physical goods have to be manufactured and shipped.

Xero reported in its FY22 half-year result that its gross profit margin improved by another 1.4% to 87.1%. This means that a large majority of new income for Xero can turn into gross profit. Xero is utilising this money to invest in further growth.

The company said it’s seeing “strength” with a number of its software as a service (SaaS) metrics. Over HY22, its average revenue per user (ARPU) increased by 5% to NZ$31.32.

Xero also said that its subscriber ‘churn’ was low and went lower. HY22 churn was 0.88%, down from 1.11% in HY21.

Global growth for Xero

The ASX tech share started operations in New Zealand but it is now a global accounting software business.

In Australia and New Zealand, it reached 1.72 million subscribers – that was an increase of 20% year on year, with 22% growth in Australia to 1.24 million. Xero said this points to the “positive potential of international segment.”

The business is growing quickly outside of Australia/New Zealand.

In the UK, it grew subscribers by 23% to 785,000 in HY22. It’s looking to grow by expanding its compliance and tax offerings. In North America, subscribers rose 23% to 308,000. Xero is looking to grow in both the US and Canada.

Xero is also aiming to gain a significant presence in the ‘rest of the world’ segment. HY22 saw subscribers grow by 48% to 201,000. The ASX tech share is making “strong progress” in South Africa and Singapore.

Platform business model

Xero wants to build its small business platform. Indeed, CEO Steve Vamos said:

We are committed to delivering the world’s most insightful and trusted small business platform to make life better for people in small business, their advisors and communities around the world.

The company is seeing growth in the number of Planday users and employees being paid through Xero payroll. The total payment value is also increasing on Xero’s platform.

Xero is directing the cash flow it generates to grow its platform to “drive long-term shareholder value”.

The percentage of revenue that comes from its platform, rather than core accounting, is growing. In HY22, platform revenue was 11% of the total revenue, up from 6%. Platform revenue increased 104% year on year, or 37% excluding revenue from acquired businesses.

Xero share price targets

Ord Minnett rates Xero as a buy, with a price target of $107. The broker thinks Xero can benefit from global tailwinds toward cloud software. Citi also rates Xero shares as a buy, with a price target of $132.60.

At the time of writing, Xero shares are swapping hands for $93.68, down 0.92% for the day. The Xero share price has dived 36% year to date and 32% over the past 12 months. Its 52-week high is $156.65.

The post Why the Xero share price is a buy right now: experts appeared first on The Motley Fool Australia.

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More reading

Citigroup is an advertising partner of The Ascent, a Motley Fool company. 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 Bruce Jackson.

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