Why I’d buy and hold this ASX 200 share until 2030

I think there are a number of S&P/ASX 200 Index (ASX: XJO) shares that could be worth owning, some with the long term in mind.

In my opinion, the Xero Limited (ASX: XRO) share price is at a great level for a long-term investment.

What’s Xero? It’s one of the largest accounting software providers in the world. One of the most important things about this business is that all of its software is online only. That makes it very accessible. Anyone can use it anywhere in the world, at any time.

It has been a strong performer over the last decade. In the past 10 years, it has risen by around 1,550%.

But, the recent volatility experienced by the market caused by inflation and higher interest rates could have opened up a buying opportunity for a business that still has a long-term growth plan.

I’ll explain why I like it.

Strong revenue outlook

Xero’s revenue has grown enormously over the years. In May 2014, the business passed NZ$100 million in annualised subscription revenue, while full-year operating revenue for the year to March 2014 was NZ$70.1 million.

In FY22, being the year to March 2022, operating revenue increased by 29% to NZ$1.1 billion and annualised monthly recurring revenue (AMRR) grew by 28% to NZ$1.2 billion.

The company is able to grow revenue in two main ways.

Its total subscriber numbers continue to rise — in FY22 it went up 19% to 3.3 million. It’s expanding globally, paying particular attention to places like the UK and Canada, which are even bigger markets than Australia. It’s these regions that could be important drivers for the Xero share price.

Xero can also grow its average revenue per user (ARPU), which improved by 7% to NZ$31.36 in FY22. I think the ARPU can continue to rise considering Xero recently implemented price increases in Australia, the UK and New Zealand.

The ASX 200 tech share already has some revenue growth baked in for FY23 because new subscribers during FY22 will pay the full 12 months of subscription fees in FY23.

I think revenue growth will be a key driver for the Xero share price in the next few years.

Excellent subscriber loyalty

One of the best reasons to like a company like Xero is that the monthly subscription generates regular cash flow.

Xero’s service is appreciated by its subscribers, which can be seen by the very low churn rate. In the second half of FY22, its churn rate was reported to be 0.9%. That means it lost less than 1% of its subscribers. This is useful for building its annualised revenue and not needing to win as many subscribers to keep growing its total subscriber number.

Having loyal customers that love the service also gives Xero more scope to pass on price increases and not lose much demand.

Strong margins

I think one of the best things about Xero is its gross profit margin. It’s so high, and rising, that most of Xero’s revenue translates into profit, which can then be used to spend on improving the business, such as sales and marketing, or product design and development.

In FY19, the ASX 200 share had a gross profit margin of 83.6%. In FY21, the gross profit margin had improved to 86%. In FY22, the gross profit margin was 87.3%.

While investors aren’t seeing how strong some of its other profit margins could be yet (like the net profit after tax), I think one day we will see it.

For now, the company is investing huge amounts into growth. But, eventually, that investing will slow and the strong gross profit margin will help other profit lines such as the earnings before interest, tax, depreciation and amortisation (EBITDA) as well.

Better valuation

I think investing is about finding good investments at a decent price, then being patient and holding it.

I’ve outlined why I think that Xero is a great business. In terms of the price, the Xero share price is now a lot cheaper. It’s down close to 50% this year, so it’s a lot better value, in my opinion.

I’d be very happy to own this business until 2030. It’s still seeing lots of growth opportunities, which is why it’s investing so much to capture that growth. I think it’s a good sign that this globally focused business is still striving to become a lot bigger.

The post Why I’d buy and hold this ASX 200 share until 2030 appeared first on The Motley Fool Australia.

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More reading

• How I’d build a portfolio by investing in top ASX shares now
• 3 excellent ASX 200 growth shares experts rate as buys
• Goldman Sachs names 2 quality ASX tech shares to buy right now
• These 3 ASX shares have halved this year. I’d buy 2 of them: advisor
• The Xero share price just hit a new 52-week low. Is it time to buy?

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.

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