Where next for the Xero share price as subscribers pass 2 million?

Half-year results at a glance

In the wake of Xero’s half-year results and with the stock now floating around all-time-highs, we take a look at where two analysts think the share price could head next.

The market loves what it saw yesterday, apparently. As part of its H1 FY20 results, Xero announced that its revenue soared 32% to reach $338.7m, that total subscribers grew 30% to reach 2.057m and that 'EBITDA excluding impairments of $65.9 million almost doubled from $34.5 million in H1 FY19.'

'Annualised monthly recurring revenue increased 30% to $764 million.'

In step with these bold H1 FY20 results, investors bid Xero’s share price some 9.23% higher, to $73.950 per share, during yesterday's trading session.

Xero is indeed growing fast, with the company pointing out that:

'While it took more than a decade to add Xero's first million subscribers, it took just two and a half years to add the next million, demonstrating the pace of Xero's adoption across a number of markets.'

Yet as Xero flirts with all-time-highs, investors are likely wondering: how much longer can the company's stratospheric growth continue?

Indeed, by traditional valuation metrics Xero trades at a set of frothy multiples. Its revenue of $338 million – though impressive – comes off a market capitalisation of $10.46 billion.

Xero share price: the analyst view

Pesky valuation metrics aside, some analysts were indeed pleased with Xero’s H1 results.

Royal Bank of Canada (RBC) analysts for example, took this chance to reiterate an outperform rating and a share price target of $80.00.

Centrally, RBC was impressed by Xero’s subscriber numbers, free-cash flow and continues tout the cloud-focused company’s ‘global scalability’ potential as a key ‘X factor’.

The Australian broker, Ord Minnet seemed decisively less impressed by Xero’s results, noting that recent legislative changes in the UK and Australia could see subscriber growth moderate in these regions.

Unsurprisingly then, Ord Minnet has a lighten recommendation and a share price target of $53.00 on Xero.

The outlook moving forward

Xero's CEO, Steve Vamos, commenting on Xero’s outlook/ forward-facing focus said:

'Xero will continue to focus on growing its global small business platform and maintain a preference for reinvesting cash generated, subjected to investment criteria and market conditions, to drive long-term shareholder value.'

In slightly more concrete terms, it was also noted that:

'Free cash flow in the financial year 31 March 2020 is expected to be a similar proportion of total operating revenue to that reported in the financial year to 31 March 2019.'

With such aggressive growth plans, it will be interesting to see how long it takes Xero to hit its next million subscribers.

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