Xero shares rise as Morgan Stanley reiterates bullish thesis
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The news: Shares in Xero climbed on the ASX as Morgan Stanley analysts hiked their price target by 21% on the accounting software provider, pointing to an "attractive structural growth story" with improved profitability and free cash flow.
The numbers: Xero shares added 3.1% to its share price, rising to $141.07 by 1:35pm AEST.
Morgan Stanley analysts retained their 'overweight' rating on the stock and lifted their price target from $140 to $170 per share.
Key to their bullish thesis on Xero over the past 18 months, they said, had been the company's pivot to "meaningfully raise prices" after over five years of "flattish" average revenue per user (ARPU).
The analysts noted that Xero's ARPU lifted 11% in Australia and New Zealand in FY24, and 17% internationally, representing the company's highest growth in the past 10 years. As a result they believed Xero's recently announced price increases in Australia and New Zealand could underpin another 8% ARPU lift in FY25.
Meanwhile, churn remained "near decade lows" at 0.8% per month in Australia and New Zealand and 1.3% internationally.
The context: Morgan Stanley viewed Xero's second-half and full-year results, released in May, as a beat to its own and consensus expectations.
Annual price increases, low churn, and falling marketing costs as a percentage of sales are the three variables that are critical to Xero being able to create "substantial shareholder value" over the next three to five years, the analysts said.
The source: Morgan Stanley research
