The Xero Ltd (ASX:XRO) share price is down 32.7% since the start of 2025. Is it time to add XRO shares to your watchlist?
XRO Share Price in Focus
Founded in 2006 in Wellington, New Zealand, by Rod Drury, Xero has evolved into a global leader in cloud-based accounting software. With Drury at the helm until 2018 and under a new CEO since, the company has witnessed significant growth, now employing over 3,000 people and serving millions of subscribers across the globe.
Xero’s “beautiful accounting software” is primarily designed for accountants and bookkeepers, enabling them to provide enhanced services to small business clients. Its platform offers real-time financial data accessible from any device, empowering small business owners and their advisors with timely insights.
While Xero’s core cloud accounting platform is predominantly used in New Zealand, Australia, and the UK, it has also made inroads into the United States market, albeit to a lesser extent.
The Appeal of ASX Information Technology Shares
The S&P/ASX200 Info Tech Index (ASX: XIJ) has reported an average annual return of -0.52% over the last five years, contrasting sharply with the broader ASX 200’s return of 5.51%. This backdrop raises interest in tech shares like XRO, which are attracting attention for several reasons.
High Margins
Tech companies frequently boast better margins compared to traditional brick-and-mortar businesses, resulting in higher overall profitability. This advantage stems from lower marginal costs and reduced overhead expenses, such as those related to physical infrastructure.
Xero’s latest annual report highlights impressive financial metrics, showcasing gross margins of 88.20% and an operating margin of 15.10%, underscoring its efficient business model.
Recurring Revenue
The subscription-based model prevalent in many tech businesses, particularly those utilizing a ‘software-as-a-service’ (SaaS) approach, offers a steady stream of recurring income. This model mitigates the revenue volatility often seen in one-time product sales, providing a smoother and more predictable revenue stream over time.
Global Scale
One of the significant advantages of tech firms like Xero is their ability to operate on a global scale with relatively low additional cost and effort. Unlike physical businesses burdened with logistical challenges and regulatory hurdles, tech companies can reach worldwide markets effortlessly through their software, which is simply reliant on internet connectivity.
XRO Share Price Valuation
As a growth-oriented company, a useful way to gauge the value of Xero’s shares is to examine its price-to-sales ratio (P/S ratio) over time. Currently, Xero Ltd shares carry a price-sales ratio of 12.22x, notably lower than its five-year average of 18.65x. This discrepancy indicates that the shares are trading below their historical average—suggesting either a decline in share price or an increase in revenue, with recent years witnessing consistent growth in Xero’s revenue.
It’s crucial to remember that while this valuation technique offers insights, it should not be the sole metric for making investment decisions.
For those seeking deeper knowledge, the Rask websites provide a wealth of resources, including free online investing courses. These courses cover critical financial concepts such as Discounted Cash Flow (DCF) analyses and Dividend Discount Models (DDM), complete with free valuation spreadsheets to enhance your investment strategies.