One of the S&P/ASX 200 Index‘s (ASX: XJO) better performers in 2020 so far has been the Xero Limited (ASX: XRO) share price. Xero shares are trading at a price of $91.35 at the time of writing, after reaching a new, all-time high of $95 on Monday. Xero shares are now up 14.19% year to date and up 67% since the lows we saw back in March. Anyone who bought Xero 5 years ago today would be sitting on a near 500% gain.
So after this stellar rise, I think many investors are asking today if (or perhaps when) Xero shares are going to hit 3 digits – a $100 share price.
Why is the Xero share price near all-time highs?
Xero is without question a high-octane growth share, and this is what has been driving buying pressure into the Xero share price. This company offers cloud-based accounting software on a software-as-a-service (SaaS) business model. This type of business model is highly lucrative and accommodative to massive potential returns. That’s because (unlike say a car company) it costs Xero almost no additional capital if it sells its software to 100 customers or 1,000. Thus, if Xero is growing its subscribers at a healthy rate, its profits will be scaling and growing exponentially.
And Xero is indeed growing subscribers at a healthy rate. Back in May, Xero reported that it grew its subscriber base by an impressive 26% in the 12 months to 31 March. If this kind of growth rate continues for even a few years, it will result in very healthy profits for the company, considering its margins are more than 85%.
It’s these impressive growth numbers that have lead to Xero’s fantastic year so far.
Is $100 in sight?
I believe it’s a case of ‘when’ and not ‘if’ on this one. Xero is a fast-growing company but it’s also in a fast-growing tailwind. All over the world, governments are pushing to convert tax collection to digital. Our own Australian Taxation Office (ATO) has been making aggressive shifts to a digital platform for tax collection for a few years now. In the United Kingdom, HM Revenue and Customs (the UK’s ATO equivalent) has gone one step further and is making the use of digital software like Xero compulsory. I can see the ATO and other tax agencies going down this path over the next decade.
All of this bodes very well for Xero and is why I’m bullish on this company going to $100 per share and beyond. Its valuation might look expensive today, but it’s tomorrow that investors are looking at for this company.
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Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Xero. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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