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3 reasons why the Xero (ASX:XRO) share price could be a buy

There are a few good reasons why the Xero Limited (ASX:XRO) share price could be a buy. One of them is its growing market position.
The post 3 reasons why the Xero (ASX:XRO) share price could be a buy appeared first on The Motley Fool Australia. –

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There are few reasons why the Xero Limited (ASX: XRO) share price could be worth watching for the coming years.

What is Xero?

Xero describes itself as a cloud-based accounting software platform for small businesses globally. With Xero, it says that small business owners and their advisors have access to real-time financial data any time, anywhere on any device. Xero offers a platform of over 800 third-party apps and over 200 connections to banks and other financial partners.

What was the most recent result like?

Xero revealed its FY21 half-year result in November 2020.

It said that operating revenue increased by 21% to NZ$410 million. Xero’s total subscriber numbers went up 19% to 2.45 million.

Whilst average revenue per user (ARPU) decreased by 4% to NZ29.81, annualised monthly recurring revenue rose by 15% to NZ$877.5 million.

HY21 earnings before interest, tax, depreciation and amortisation (EBITDA) went up 86% NZ$120.7 million. Xero’s net profit after tax (NPAT) went up NZ$33.1 million to NZ$34.5 million and free cash flow rose NZ$49.4 million to NZ$54.3 million.

The total lifetime value of subscribers rose 15% to NZ$6.17 billion and the gross profit margin percentage increased from 85.2% in the prior corresponding period to 85.7%.

3 reasons why the Xero share price could be interesting

1: SaaS model

Software as a service (SaaS) simply means delivering a regular service in the form of software, such as accounting software.

Xero subscribers pay a monthly fee, which generates consistent cashflow for the company. Some investors view SaaS revenue as being quite defensive, particularly if those customers are sticky and loyal.

2: Growing market position

Xero is steadily gaining market share across the different geographies that it operates.

In the FY21 half-year result, it saw Australian subscriber numbers increase by 21% to 1.01 million, UK subscribers grew by 19% to 638,000 with revenue rising 33%, New Zealand subscribers went up 13% to 414,000, North American subscribers went up 17% to 251,000 and ‘rest of world’ subscribers went up 37% to 136,000. Growth was led by South Africa, and the company said that further progress was made in Singapore.

3: Strong operating leverage

Xero has been re-investing a lot of its revenue growth back into the business. In the current COVID-19 operating environment, Xero has been more careful with its spending which has shown how much its profit measures can grow when it’s not investing so hard.

One of the statistics that shows the operating leverage strength of Xero is the gross profit margin of 85.7%.

In the above HY21 result numbers, revenue increased by NZ$71.2 million, EBITDA increased by NZ$55.9 million and free cashflow went up NZ$49.4 million. That suggests that the incremental EBITDA margin and the free cashflow margin are high.

Xero’s final comments

Xero shared some comments about its outlook in the HY21 result. It said that it’s a long-term orientated business with ambitions for high-growth. Management said that the business continues to operate with disciplined cost management and targeted allocation of capital. Xero said this will allow the company to remain agile so it can continue to innovate, invest in new products and customer growth, and respond to opportunities and changes in the operating environment.

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More reading

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Xero. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

The post 3 reasons why the Xero (ASX:XRO) share price could be a buy appeared first on The Motley Fool Australia.

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