Up 59% this year, I think the Xero share price can keep climbing in 2023

A cloud with a blue arrow pointing upwards through its middle symbolising a rising asx share priceA cloud with a blue arrow pointing upwards through its middle symbolising a rising asx share price

The Xero Limited (ASX: XRO) share price has done exceptionally well in 2023, rising by 58.53%. The S&P/ASX 200 Index (ASX: XJO) has only gone up by 3.38% in the year to date.

I’ve been confident about Xero’s recovery for a while now. It has gone up a long way since my optimistic call in March on the ASX growth share, but I believe the business can keep performing from here.

I’m going to explain why I believe it can beat the ASX 200 over the rest of this year and hopefully outperform up until 2030 as well.

Strong subscriber metrics

One of the main things that is helping drive Xero forwards is its growth of subscriber numbers. Those subscribers are paying the ASX tech share a monthly subscription fee, providing predictable cash flow.

The technology company is seeing a number of positive metrics with its subscribers, which I expect will continue in the first half of FY24, which can help drive the Xero share price.

The FY23 result saw total subscribers rise by 14% over the year to 3.74 million. It’s achieving strong organic growth with the average revenue per user (ARPU) increasing by 10% to $34.61.

Xero’s subscriber churn in FY23 was very low at just 0.90%, meaning its subscribers are very loyal (which allows the company to increase its subscription prices with little negative effect).

All of the above elements combined led to the total lifetime value of subscribers increasing by 23% to $13.4 billion.

Good revenue and gross profit margin

Businesses that are growing revenue at a good pace are growing their scale and that can help the business spend more on other activities like market, research and development, which is a very positive cycle.

Xero’s revenue is growing very quickly – in FY23 it saw 28% growth thanks to more subscribers and a higher ARPU.

The company has one of the highest gross profit margins on the ASX, which means that a lot of the new revenue also turns into gross profit, which can then be utilised by the business to spend more and/or become more profitable. In FY23, Xero’s gross profit margin was 87.3%.

I’m expecting Xero’s gross profit to keep climbing strongly in the coming years thanks to the subscriber growth.

Expectations of stronger profits in the coming years

One of the most exciting things to me about the potential for the Xero share price is that the company is planning to become much more profitable.

Increasing the size of the business usually comes with scale benefits, but management is now deliberately choosing for the business to become more profitable. The company is targeting an operating expense to operating revenue ratio in FY24 of around 75%.

The operating expense ratio to operating revenue ratio was 80.7% in FY23, so the next year could show a big improvement in profitability.

As the business continues to become bigger, I think the expense to revenue ratio can continue to improve, which will show the market how profitable the underlying operations truly are, which could impress the market and send the Xero share price even higher, in my opinion.

Foolish takeaway

Xero has done very well for shareholders in the first few months of 2023, and I think the FY24 half-year result could be another catalyst for the ASX tech share to keep rising.

By 2030, I think Xero could become one of the most profitable non-bank, non-miner businesses if it keeps growing subscribers and its profit margins.

The post Up 59% this year, I think the Xero share price can keep climbing in 2023 appeared first on The Motley Fool Australia.

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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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