Is the Xero Limited (ASX: XRO) share price in the buy zone today?
Xero shares sure have had a strong week, rising from close to $60 last Thursday to today’s current price of $64.18 (at the time of writing) – a rise of nearly 7% in under a week. This of course is on top of a stellar year for Xero, with any shareholders lucky enough to buy in just after new year’s looking at a year-to-date gain of 53%.
That’s all well and good, but it’s always easy to see a raging buy in hindsight, so what is Xero’s current share price telling us?
Since the stock first crossed the $60 mark back in mid-May, Xero shares have been stuck in a trading range between $60 and $67 – with today’s share price smack bang in the middle of this band. By any conventional measure, this price range is extremely expensive – Xero is valued at around $9 billion, but the company has yet to turn a profit. Still, with nearly 2 million subscribers, a revenue growth rate of 36% and earnings growth of 52%, you can see why investors are valuing the company so highly.
Xero is also in exactly the kind of tailwind you would want in a growth stock. The company offers cloud-based accounting software on a subscription basis – meaning that most revenue is recurring (the investing equivalent of the Holy Grail).
Not only does completing taxes and other business functions online make life a lot easier for most businesses, the Australian Taxation Office (ATO) is increasingly pushing taxpayers toward more online-based reporting. Over in the UK, HM Customs and Revenue (the motherland’s ATO equivalent) has already forced small businesses to go online completely for their tax affairs. If the ATO and other tax offices around the world go down this path (which is looking likely), it will no doubt continue to fuel growth in Xero’s subscriber base.
Although I love Xero and think it is a top-notch growth stock, it’s difficult for me to place a buy price on it while it remains unprofitable. If I were to enter a position, I would look for a significant discount to its current trading band.
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Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Xero. The Motley Fool Australia has no position in any of the stocks mentioned. 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.