3 reasons why Xero (ASX:XRO) is such a high-quality ASX share

There are a number of reasons why Xero is such a high-quality ASX share worthy of being in most portfolios.

The cloud accounting software business started off in New Zealand but has now expanded significantly to become a global business.

The Xero share price has gone up by 74% over the last year. There are a few reasons why it could just keep climbing:

High margins

Xero has one of the highest gross profit margins on the ASX.

In the FY21 half-year result it reported that the gross profit margin increased from 85.2% to 85.7%. That shows how profitable it is for Xero to add new subscribers.

The power of software is that it can be replicated for clients at very little cost.

Almost all of the new revenue falls to the next profit line.

Xero invests a lot of money into growing the business, but COVID-19 saw the company remain disciplined with spending money. It showed how profitable it could become in the future. Whilst operating revenue grew by 21%, earnings before interest, tax, depreciation and amortisation (EBITDA) went up 86% to $120.8 million.

Long-term growth focused

Xero has been focused on growth for over a decade. It’s trying to invest as much as it can into initiatives that make sense to improve its offering for subscribers and growing market share.

This results in a lower EBITDA and net profit margin than it is capable of, but it grows the value of Xero for shareholders faster (in a more tax efficient way).

Indeed, Xero says:

Xero is a long-term orientated business with ambitions for high-growth. We continue to operate with disciplined cost management and targeted allocation of capital. This allows us to remain agile so we can continue to innovate, invest in new products and customer growth, and respond to opportunities and changes in our operating environment.

Xero has been making bolt-on acquisitions to fast-track an improved product. Tickstar and Planday are two of the latest examples.

Xero is a global leader

Xero is arguably the best cloud accounting company in the world.

It has created numerous time-saving and useful tools, including workflows that can be automated.

The cost of a Xero subscription to subscribers is relatively low, making it very attractive value for business owners and accountants who appreciate how quickly the software does what they want it to. Time is money, after all.

Xero reported in the FY21 half-year result that its total subscriber numbers increased by 19% to 2.45 million in the FY21 half-year result. That included 1 million subscribers in Australia (up 21%), 638,000 in the UK (up 19%), 414,000 in New Zealand (up 13%) and 251,000 in North America (up 17%). The other segment that Xero reports is ‘rest of the world’ which had 136,000 subscribers – an increase of 37%. The rest of the world includes dozens of countries, but notable locations include South Africa and Singapore.

It’s already one of the largest tech shares on the ASX, it could become one of the biggest overall companies in the years to come. 

More reading

• One MASSIVE thing about Tesla and Afterpay that people forget
• 2 quality SaaS ASX shares to buy in May 2021
• Why the Xero (ASX:XRO) share price charged higher in April
• 3 stellar ASX growth shares for investors in May
• The Xero (ASX:XRO) share price is smashing the ASX 50 this month

Tristan Harrison 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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