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Why I think Xero and 1 other ASX growth share are in the buy zone

With trade war concerns heightening, ASX growth stocks have taken a beating as a result of a wider tech sell off in the United States (US). However, this creates attractive buy opportunities for companies that have a strong track record for outperforming the market.

Xero Limited (ASX: XRO) and Webjet Limited (ASX: WEB) are two companies based down-under that are capitalising on international opportunities. Both have consistently rewarded investors with savvy returns and there is no reason why this won’t be the case in earnings season.

Xero

Xero offers a cloud-based accounting software-as-a-service product for small-to-medium businesses.

The company’s share price is up 43% over the year, but it stooped 7% lower yesterday to $59.97 due to a wider tech sell-off. Given Xero’s forward price-to-earnings (P/E) ratio of 303x, it’s no wonder its share price movements are hypersensitive to the market.  

In its full-year results announced back in May, Xero released exciting data about its subscriber additions which increased by:

  • 151,000 in the United Kingdom (UK)
  • 139,000 in the US
  • 83,000 in the rest of the world.

Xero also launched new offices in Hong Kong and South Africa. The company’s subscription model means it has a high percentage of recurring revenue. It also has a high gross margin of 83.6%, which rose from 81.5% in FY18.

Ultimately, Xero has a sticky product which is loved by SMEs for its usability and robustness. Despite its lofty valuation, this seems a fair price to pay for a company with an international presence that is rapidly expanding.

Webjet

Webjet is both a business-to-consumer and business-to-business (B2B) digital travel agency. It allows users to compare and combine flights, accommodation, packaged holiday deals, insurance and hire cars domestically and internationally.

Despite its share price rising 19% in the year to date, Webjet’s valuation has been consistently falling since the federal election. It hit its peak of $16.87 in mid-May and has since stooped to $12.64, as of yesterday’s close.

There are several factors that could explain this. Webjet’s deal with Thomas Cook in the UK sparked investor concerns back in May and also had issues raised by its previous auditor. However, it could also be the case that lower consumer confidence in general has weakened the travel sector.  

Nevertheless, Webjet’s growth metrics remain strong. Earnings per share growth has averaged 36% per annum over the last 5 years. Its B2B segment, WebBeds, has also been a highlight for investors, having grown 50% in the first half of the year. Furthermore, the company has been investing in blockchain capabilities that are expected to boost productivity.

Webjet is expected to hit earnings before interest, tax, depreciation and amortisation (EBITDA) of $120 million in its full-year earnings, which will be released on 22 August. Given strong product metrics and overall business growth to date, Webjet’s share price may be a bargain at its current levels.

If you’re still contemplating where to put your dollars this week, here are some more fantastic stock recommendations for you to consider.    

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Motley Fool contributor Audrey Thehamihardja has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Xero. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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