The Xero Limited (ASX: XRO) share price has performed strongly. But it could still be attractive at these levels.
Over the last year Xero shares have risen more than 52% and in the last five years it has gone up by more than 660%.
With a market cap of over $20 billion, Xero is priced for a lot of success. But the market may be underestimating how much success is yet to come.
Excellent profit margins
One of the main reasons why Xero stands out so much is that it has a very high gross profit margin which means that a lot of the new revenue actually turns into gross profit and gives the company more funds to spend on areas of the business. It is heavily pursuing growth investment for the foreseeable future.
In FY21, Xero’s gross profit margin improved by 0.8 percentage points, from 85.2% to 86%. It is steadily edging higher towards 90%.
Long-term subscriber growth runway
Xero has built its subscriber base to more than 2.7 million. It has built a very strong market position in New Zealand and Australia. But there are number of different regions such as the UK, North America and South Africa where it still has a long growth runway that it can grow.
The lifetime value of each subscriber is steadily rising, so I believe that Xero’s subscriber base is becoming ever more valuable as time goes on.
Acquisitions
Xero has an excellent core product which is growing around the world.
But acquisitions have the potential to open up a larger total addressable market for the company. Planday, Tickstar and Waddle have improved the client offering and added revenue.
Diversification could open the door to new regions or other parts of the accounting ecosystem. Also, its current software is targeted at small and medium businesses. What about large clients?
Summary thoughts about Xero and the share price
Xero looks expensive, but it has looked expensive for a long time. If its subscriber base and the lifetime value of subscribers keeps rising, then it could become a very profitable business in future years.
It’s one of the highest-quality ASX growth shares on my watchlist.
