Here’s why this top broker thinks Xero shares are a buy…
The post Top broker says Xero (ASX:XRO) share price is a buy appeared first on The Motley Fool Australia. –
The Xero Limited (ASX: XRO) share price has been a positive performer over the last few weeks.
Since this time in August, the cloud accounting platform provider’s shares are up 3.5% to $152.75.
This compares favourably to a broadly flat performance by the S&P/ASX 200 Index (ASX: XJO) over the same period.
Why is the Xero share price pushing higher?
The decent gain by the Xero share price over the last month appears to have been driven by a broker note out of Goldman Sachs at the start of August.
According to the note, its analysts reiterated their buy rating and $165.00 price target on the company’s shares.
Based on the current Xero share price, this implies potential upside of 8% over the next 12 months.
Why is Goldman positive on Xero?
Goldman Sachs is positive on Xero due to its strong revenue growth potential. In fact, the broker is forecasting its revenue to double by FY 2024 due to a combination of subscriber growth, price increases, and mergers and acquisitions (M&A).
The broker commented: “We expect XRO revenue to double across FY21-24E (+26% CAGR), driven by: (1) ARPU growth from the recently announced price rises (benefiting FY22/23E) and the introduction of this app store fee (benefiting FY23/24E); (2) Subscriber growth, given accelerating subscriber growth across all geographies in 2H21, and strong recent traction from its Enterprise strategy (i.e. recently signed a Global partnership with DFK, the 7th largest Global Accounting Association, to complement agreements with BDO/RSM); and (3) M&A, with the Planday acquisition to contribute +3% growth in FY22E.”
App Store launch
Goldman was also pleased with the launch of the Xero App Store across the ANZ and UK markets. It notes that this will streamline and simplify access to the ~1,000 apps currently available, with Xero earning a 15% royalty on subscriptions purchased through the store.
It said: “We see this as a positive step from Xero, which is increasingly focused on monetizing its strong market positions within the ANZ and UK markets, with the incremental revenues used to accelerate its ongoing global expansion.”
“We previously outlined our belief that a 10-15% app-store fee was possible for Xero, given this would provide consistency across the Xero app developers to incentivize continued investment, while being comparable to a number of digital marketplaces globally who have app fees ranging from 12% (Epic Games) to 30% (Apple, Google, Steam, etc).”
“Although the quantum of app attachment rates is uncertain, we estimated that a 15% app store fee could open up an incremental NZ$1.4bn of TAM, with these earnings likely to be 100% margin,” it concluded.
All in all, although the Xero share price is up 62% over the last 12 months, Goldman doesn’t believe the gains are over.
Should you invest $1,000 in Xero right now?
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Motley Fool contributor 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 and has recommended Xero. The Motley Fool Australia owns shares of and has recommended Xero. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.