The Xero Limited (ASX: XRO) share price has performed very well in recent years. There are a few factors that could allow it to keep performing.
Xero is an accounting technology business that allows people to access their financials and tools anywhere at any time.
Whilst the Xero share price has gone up by more than 700% over the last five years, I think it’s on track to do well over the coming years for these three reasons:
Excellent underlying margins
As a technology business, Xero would be able to achieve very attractive profit margins, if it wasn’t investing so much for growth.
But, investors have been given hints about how profitable it is over the last couple of years.
Several weeks ago, Xero released its FY22 first half result. In that, Xero reported that its gross profit margin increased by another 1.4 percentage points to 87.1%, which is very high.
In the first half of FY21 when it reined in the spending a little during COVID-19, the Xero operating revenue rose by NZ$71.2 million, whilst free cashflow increased by NZ$49.4 million and net profit after tax rose NZ$33.2 million. I think Xero’s future looks very profitable, if it keeps growing.
Strong global growth
Xero is growing really fast, in multiple countries. In the first six months of FY22, it saw the number of subscribers increase 23% to 3 million. Continuing subscriber will help grow the Xero share price and various other parts of the business.
The subscriber growth is leading to solid revenue growth. Australian revenue rose 22% to NZ$224.9 million, New Zealand revenue went up 13% to NZ$72 million, UK revenue grew 24% to NZ$132.8 million and the rest of the world revenue grew strongly thanks to growth particularly from South Africa and Singapore.
I think that regions like the UK, Canada and Australia offer plenty of long-term growth potential.
Attractive subscriber economics
Whilst the number of subscribers continues to rise, I think that Xero is extracting better value from its global customer base.
In that HY22 result, Xero’s average revenue per user (ARPU) grew by 5% to NZ$31.32. Its subscriber loyalty is helping grow the total lifetime value of its subscribers. I think this shows that Xero has more revenue banked than some investors realised. That lifetime value grew by 61% to NZ$9.94 billion in the latest result.
Summary thoughts on the Xero share price
Xero is pursuing global growth. Some markets are reaching a different phase, like New Zealand, but there’s still double digit growth potential for a long period of time. Profitability can continue to increase as it offers more services and benefits from scale.
Looking at many of the biggest ASX shares around, Xero is one I’d rather own for the long-term than the banks, supermarkets or ones like that.
