The Xero Limited (ASX: XRO) share price might be a buy based on a few different factors for the business.
What does Xero do?
Xero is a cloud accounting software business.
It has captured a lot of market share because it’s an online-only offering. Xero can be accessed anywhere at any time. People don’t have to update it either.
The software is also extremely functional. It has so many time-saving features and tools to help business owners and accounts do what they need to do quicker.
Xero’s subscription is also very affordable for businesses, whether that’s just doing a simple business with a small amount of payroll, or a family large organisation.
Why the Xero share price could be a good one to consider
Global addressable market
Xero is focused on a few key markets like Australia, the UK, the US and New Zealand.
However, Xero is now accessible in dozens of countries and it is growing its ‘rest of the world’ subscriber number at a very fast rate.
Places like Singapore and South Africa are seeing attractive growth for Xero. But plenty of other countries could become larger markets, like Canada.
I think it shows that Xero still has a long global growth runway.
Predictable cashflows
Xero operates with a software as a service (SaaS) model.
What that means for Xero is that subscribers are signed up to pay the (attractively low) monthly subscription fee.
As Xero’s total subscriber number grows, that monthly revenue and cashflow increases.
The average lifetime of a subscriber is a few years, so it is adding attractive long-term cashflow as it gets bigger.
Businesses with predictable cashflow are highly valued for their consistency.
Excellent underlying margins
Xero has very good underlying margins.
It can be quite hard to see that because of all of the investing for growth that Xero is doing.
However, I think the HY21 result showed a very profitable business underneath the reported numbers.
In that half-year resultt it was careful with spending, leading to an increase in profitability.
It reported that operating revenue increased NZ$71.2 million in the first six months of FY21, EBITDA (EBITDA explained) rose NZ$5.9 million, net profit after tax went up NZ$33.1 million and free cashflow increased NZ$49.4 million.
When you look at those increases in percentage terms compared to the operating revenue increase, you can see that Xero can generate a lot of profit growth, if it wanted to.
Winners keep winning
Over time, it has been a relatively small number of businesses that produce most of the outsized returns. Xero has been one of them and it has the potential to keep growing nicely with its addressable market and strong margins.
It’s one of the ASX growth shares I’d definitely want to have on the watchlist.
