There are plenty of reasons to like owning shares of Xero Limited (ASX: XRO) in 2019 and beyond?
Founded in New Zealand in 2006, Xero has become the dominating player in the business and accounting software market in Australia, New Zealand and the UK. Employing more than 2,300 people, Xero helps more than 1.8 million subscribers manage their accounting and tax obligations.
3 Reasons To Own Xero Shares In 2019
Superior Product
One of the main considerations why people choose one product over another is which one is the best.
Business owners hopefully think their time is valuable, so anything that can help them do their business operations, issuing invoices and do bookkeeping quicker is going to be attractive to those people.
Accountants and bookkeepers also benefit significantly from the automation and other tools offered by Xero.
Offering the entire product on the cloud/internet which is accessible 24/7 from anywhere is a very good proposition.
Global Growth
The best ASX businesses are the ones that are growing internationally because it gives them a much bigger growth runway, or a larger total addressable market (TAM).
Xero is growing in many places. For the first time in the FY19 result, international net subscriber growth of 239,000 was more than Australia and New Zealand growth of 193,000.
UK net subscriber additions were 151,000 in FY19, with over 100,000 net subscribers added in the second half of FY19. North American subscribers increased by 63,000 to 195,000 and the ‘rest of the world’ added 83,000 with offices established in Hong Kong and South Africa.
One would think that Canada would be a logical next step for major growth for Xero.
High Margins
Xero has a very impressive gross margin that continues to climb. In the FY19 report it showed that its gross margin increased to 83.6% from 81.5% in the year before.
Its this high margin which allows most of the new revenue to fall to Xero’s profitability – Xero’s EBITDA excluding impairments increased 84% to $91.78 million for the year.
One great thing about Xero’s revenue is that it’s very sticky – it’s recurring. Customers have little reason to leave and pay monthly, which is great for cashflow. Sticky revenue means that Xero can increase prices in the future with hopefully little negative effect, which would improve profit and the margin even further.
Is Xero A Buy?
The cloud accounting business has so many positive attributes, but the valuation is the main sticking point for me.
With a share price of above $65 I think it seems expensive, but I suppose low interest rates do justify paying a higher price. It’s hard to say what a good price to pay for Xero is.
It might be easier to say what the right price is for the exciting and rapidly growing businesses in the free report below.
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