Xero shares could continue to rise as growth trajectory continues

Xero (ASX: XRO) shares have risen by more than 18% year-to-date and 124% over the past five years to $134.03. The company has arguably always been one of the more popular ASX growth stories, and its recent full-year results have once again delivered on most metrics.

Of course, past performance is not an indicator of future returns.

Xero shares: full-year results

The cloud-based accounting software business saw operating revenue jump by 22% year-over-year to NZ$1.71 billion, while average revenue per user (ARPU) was also up by 14% to NZ$39.29. Further, subscribers grew by 419,000 to 4.16 million.

This double revenue growth stream helped increase gross margin from 87.3% to an impressive 88.2% — sending net profit after tax up to NZ$174.6 million from the NZ$113.5 million loss of a year before.

This move to profitability while also continuing to grow is perhaps an inflection point of any growth company. While net subscribers rose, additions fell by 11% compared to the prior financial year — with Xero noting it is now focusing on balancing subscriber additions with ARPU.

Critically, the company has now achieved the much-lauded Rule of 40, whereby a software company’s revenue growth and free cash flow margin are both above 40%, signifying sustainable growth. While not an infallible metric, this does potentially make the stock more attractive for more risk-averse investors.

CEO Sukhinder Singh Cassidy enthused that ‘This result shows we're doing what we said we'd do. We've delivered a strong and profitable FY24 result and Rule of 40 outcome, demonstrating our commitment to balancing growth and profitability. We have a clear and focused strategy to win on purpose, and Xero is positioned well as we move into FY25.’

Where next for Xero shares?

Xero has not coloured in any expectations for earnings or revenue for FY25 but did note that total operating expenses as a percentage of revenue will be around 73% across the next financial year.

Australia and New Zealand continue to be growth markets, with 22% revenue growth across both and subscribers in the region up to 2.4 million clients. However, growth in international markets was even higher, at 24%.

Perhaps the most interesting metric in the results was the subscriber retention rate which remained above 99%, a market-leading rate.

Brokers and investment banks seem convicted of the company’s prospects. Goldman Sachs have a $164 price target, and among many positive soundings noted that ‘revenue trends into FY25 are much stronger than anticipated, given better exit-ARPUs, particularly in the International segment.’

Macquarie increased its price target to $180.70, while UBS has a ‘buy’ rating and $141.90 target saying that ‘surprisingly XRO achieved the Rule of 40 this year.’ And RBS Capital Market analysts — with a price target of $130 — consider that ‘management is being conservative with other cost levers to potentially pull to beat the FY25 target.’

Xero shares may therefore continue to enjoy further growth. However, the company is operating within a highly competitive environment and perhaps more critically, there will now be pressure to maintain the Rule of 40 — to the detriment of expedited growth. Whether this pressure is reflected in corporate strategy remains to be seen.

But for now Xero shares appear to be continuing an upwards trajectory, underpinned by strong fundamentals and positive results.

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