The Xero Limited (ASX: XRO) share price has continued its impressive run on Monday and is charging higher again.
In fact, at one stage the cloud-based business and accounting software platform provider’s hit a new record high of $145.00.
When the Xero share price hit that level, it meant it was up a remarkable 82% since the start of the year.
Why is the Xero share price at a record high?
Investors have been fighting to get hold of Xero’s shares this year thanks to its strong performance despite the COVID-19 pandemic.
For example, in the first half of FY 2021, the company delivered a 21% increase in operating revenue to NZ$409.8 million. This was driven by a 19% increase in total subscribers to 2.45 million.
Things were even better on the bottom line after management’s COVID-related costs control underpinned significant earnings growth.
For the six months ended 30 September, Xero’s net profit after tax came in 26 times greater than the prior corresponding period at NZ$34.5 million.
What else is driving the Xero share price higher?
Since the release of its results, a number of brokers have released bullish notes declaring Xero as a buy.
One of those brokers is Goldman Sachs. Earlier this month it initiated coverage on the company with a buy rating and $157.00 price target. This price target implies potential upside of over 8% even from its record high.
Goldman Sachs is a fan of the company due to the quality of its product, its large and growing total addressable market (TAM), and its attractive unit economics.
As things stand, the broker estimates that Xero has a core TAM of NZ$14 billion across its key markets. Based on its FY 2020 results, this means it has penetrated only 4.6% of its TAM.
However, Goldman believes Xero can materially increase its TAM by broadening and monetising its app ecosystem and expanding into new geographies.
In fact, if everything goes to plan, the broker expects this to open a further NZ$62 billion in addressable TAM, which it feels provides “a multi-decade runway for strong revenue growth.”
It concluded: “Combined with attractive unit economics at maturity (GSe 40% EBIT margins), we believe the long-term earnings opportunity for Xero is material.”
Judging by the performance of the Xero share price, it appears as though the market agrees with this view.
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James Mickleboro 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. 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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