The Xero Limited (ASX: XRO) share price has done exceptionally well in 2023, it’s up by 60% this year. Could the ASX tech share still be worth buying?
Xero offers internet-based accounting software and business management software.
Xero share price
What’s going on with the Xero share price?
The Xero share price hasn’t actually moved much since the end of May 2023. A lot of the gain happened in the first few months as investors undid some of the valuation damage done during 2022 as investors worried about higher interest rates and inflation.
Despite the good recovery in 2023 to date, it’s still 26% lower than where it was in November 2021.
Investors seem to be less worried about the economic environment, though interest rates are as high as they’ve been in a long time, so that should still act as an anchor on the Xero share price.
Financial growth continues
At the company’s annual general meeting (AGM) in August, the CEO highlighted that the business has “strong momentum, a huge global total addressable market and a unique culture.”
In the 12 months to 31 March 2023, Xero reported that operating revenue rose 28% to NZ$1.4 billion, adjusted EBITDA (EBITDA explained) grew 45% to NZ$302 million and free cashflow increased NZ$100 million to NZ$102 million. Part of this growth was driven by the 14% rise in subscribers to 3.74 million, adding scale to the business.
It already has some growth baked in for FY24, with annualised monthly recurring revenue (AMRR) rising 26% to NZ$1.55 billion. Even if we said there would be no growth of subscribers or further subscription price rises, that suggests that operating revenue will rise more than 10% in the new financial year.
One of the most appealing things about Xero is that its gross profit margin was 87.3% in FY23, which essentially means that most of the new revenue is being turned into gross profit, which can help increase its free cash flow and fund global expansion.
Final thoughts on the Xero share price
The fact that Xero’s global subscriber base is growing in all markets is very encouraging. I think the business could eventually become one of the most profitable non-bank, non-miners on the ASX, if its operating leverage can keep playing out.
I think Xero is a great business, and over five years I think the Xero share price will outperform. But, with interest rates so high, it doesn’t seem as good value as it was a year ago. I’d look at other ASX growth shares that seem better value for their profit and revenue potential, compared to the price.
