XRO share price in focus
Founded in 2006 in Wellington, New Zealand, by Rod Drury, Xero has grown into a global leader in cloud-based accounting software. Under Drury’s leadership until 2018 and under a new CEO since, the company has expanded to employ over 3,000 people and now serves millions of subscribers worldwide.
Xero’s “beautiful accounting software” is designed primarily for accountants and bookkeepers, enabling them to better serve small business clients. It offers real-time financial data accessible on any device, empowering small business owners and their advisors with up-to-date insights.
Xero’s core cloud accounting platform is widely used in New Zealand, Australia, the UK, and, to a lesser extent, the United States.
The appeal of ASX tech shares
The S&P/ASX200 Info Tech Index (ASX: XIJ) has delivered an average annual return of 15.12% over the last 5 years, compared to the broader ASX 200’s 4.34% return. So, here’s why tech shares like XRO are drawing attention.
High Margins
Tech companies often boast better margins than more ‘traditional’ brick-and-mortar businesses. That is, they tend to be more profitable.
This is because they usually have low marginal costs and lower overheads (things like plant and equipment).
XRO’s latest annual report revealed gross margins of 88.20% and an operating margin of 15.10%.
Recurring revenue
Many tech businesses benefit from recurring revenue models like ‘software-as-a-service’ (SaaS). Compared to one-time product sales, this subscription-based approach generates consistent income, smooths revenue, and enhances predictability over time.
Global scale
Unlike physical businesses constrained by logistics, regulations, and trade wars, tech firms can often reach global markets with much less effort (and cost). By dealing in software accessible by something as simple as an internet connection, tech companies can quickly and efficiently increase their customer base.
XRO share price valuation
As a growth company, one way to put a broad estimate on the XRO share price could be to compare its price-to-sales multiple over time. Currently, Xero Ltd shares have a price-sales ratio of 16.87x, compared to its 5-year average of 18.65x, meaning its shares are trading below their historical average. This could mean that the share price has fallen, or sales have increased. In the case of XRO, revenue has been growing over the last 3 years.
Please keep in mind that context is important – and this is just one valuation technique. Investment decisions can’t just be based on one metric.
The Rask websites offer free online investing courses, created by analysts explaining things like Discounted Cash Flow (DCF) and Dividend Discount Models (DDM). They even include free valuation spreadsheets! Both of these models would be a better way to value the XRO share price.
