AUS
NZ
UK
CA
USA
FRA
GER
ESP
ITA
NLD
PRT
SWE
GRC
IND
POL
BRA
ZAF
RUS
CHN
UAE
The Xero Ltd share price has surged 25.5% since the start of 2024. Investors are showing strong interest in this cloud-based accounting software company. Let’s dive into what makes Xero an attractive option for many in the ASX tech sector.
Xero’s Growth Story
Founded in 2006 in Wellington, New Zealand, Xero Ltd (ASX:XRO) was established by Rod Drury, who served as CEO until 2018. Xero’s cloud-based software helps millions of small businesses globally manage their accounting and tax needs, employing over 3,000 people.
Xero’s platform offers accountants, bookkeepers, and small business owners real-time financial data that can be accessed from any device, helping users manage their finances seamlessly. The company has a strong presence in Australia, New Zealand, the UK, and some parts of the US.
Why Investors are Interested in ASX Tech Shares
Technology companies have garnered increasing attention from investors over the past few years. The S&P/ASX 200 Info Tech Index (ASX:XIJ) has delivered an average annual return of 13.59% over the last five years, significantly outpacing the broader ASX market’s average return of 3.70%. Here's why ASX tech shares like Xero Ltd are highly favored:
- High Margins
Tech companies often boast higher profit margins compared to traditional businesses. This is mainly due to lower marginal costs, such as distribution, and fewer overheads, like physical infrastructure. Xero’s cloud-based software operates with minimal physical costs, allowing it to achieve better margins compared to brick-and-mortar businesses.
- Recurring Revenue
Tech companies frequently operate on a subscription model, known as software-as-a-service (SaaS). In Xero’s case, customers subscribe to the platform and pay monthly or annually, providing the company with predictable recurring revenue. This business model ensures steady revenue flows, making future financial performance more predictable.
- Global Reach
Technology companies have the ability to scale globally with ease. Unlike traditional businesses that face challenges with logistics, regulations, and costs, Xero can offer its software to customers across the globe with minimal geographical restrictions. This gives the company access to a significantly larger market compared to physical product-based businesses, potentially leading to higher growth.
Xero Ltd Share Price Valuation
Xero is a growth company, and one way to analyze its share price is by comparing its price-to-sales ratio. At present, Xero Ltd (ASX:XRO) has a price-to-sales ratio of 13.81x, slightly above its five-year average of 13.37x. This suggests that Xero shares are currently trading at a premium compared to historical levels.
However, it’s important to remember that while valuation metrics like the price-to-sales ratio provide insight, investment decisions should take a broader view of a company's performance and market conditions.
Xero Ltd’s (ASX:XRO) strong share price performance in 2024 reflects its appeal as a growth stock in the ASX tech sector. With its high margins, recurring revenue model, and global reach, Xero remains a key player in the cloud-based accounting space, attracting investor attention.
