The Motley Fool

Is the Xero share price a buy at $80?

Well, it’s finally happened – shares of Xero Limited (ASX: XRO) have today crossed the $80 mark for the first time. Just after market open this morning, XRO shares crossed the $80 level – making a new all-time high of $80.86 before settling down slightly at the current share price of $80.12 (at the time of writing).

This latest move caps off an incredible year for Xero. In January, you could have picked up some XRO shares for just $42.95 – a share price that seems ludicrously cheap by today’s levels. This cloud-based accounting software provider has now returned 87% to its lucky shareholders just this year alone, and 412% over the past five.

But is Xero a buy at these levels? I personally always get a little nervous about buying a share that’s at an all-time high, let alone a share that’s almost doubled in value over 11 months, so lets have a look.

What is Xero worth?

That’s the 11.36 billion-dollar question (Xero’s current valuation). In its most recently reported results, which were for the 6 months ending 30 September 2019, Xero reported a net profit of NZ$1.3 million on top of revenues of NZ$338.7 million.

If you’re thinking it strange that an $11.36 billion company is making profits of NS$1.3 million, you’re not alone.

But investors are clearly looking at the bigger picture here. This number also represents revenue growth of 32% year-on-year, which, if continued, would see an exponential growth in profits over the coming years. Seeing as Xero also reported that churn rates for its product only came in at 1.1%, it’s highly likely that customer/subscriber numbers (already at over 2 million) will continue to snowball as well.

But at the end of the day, Xero’s current share price is at least assuming these stellar growth rates will smoothly continue well into the future. Thus, the market is pricing the company at what its expected worth will be, not as it stands today.

Foolish takeaway

I love Xero as a company and agree that its growth trajectory is extremely pleasing and potentially highly lucrative. But I’m not willing to pay the price the market is asking of us at the current time.

It is extremely difficult to predict what a company may look like 5 or more years down the road, but this is exactly what’s going on with the Xero share price today. I’ll be waiting for a more myopic pricing opportunity on this one (although I may be waiting long time).

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Motley Fool contributor Sebastian Bowen 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.