Xero is a cloud accounting software business that provides the mission-critical ability to do payroll, do bookkeeping and build financials.
What has happened to the Xero share price?
The Xero share price has fallen 20.2% since 19 February 2020, which was when it hit its all-time high. It hasn’t fallen as hard as the S&P/ASX 200 Index (ASX: XJO).
You don’t normally think of a software business as defensive, but that’s the advantage of ‘software as a service’ businesses where that service is actually essential. Plenty of tech shares have claimed to be SaaS businesses, so we’ll see how essential they actually are.
A business is required to lodge its tax return every year. Businesses will need their Xero subscription to prepare the necessary forms. That’s why I think it hasn’t fallen as much as the average ASX share. Xero is well positioned to keep earning its monthly subscription during this period with its low monthly cost.
Is the Xero share price a buy?
I think Xero is one of the best shares on the ASX. It has a world-leading product. It has very effective management. It has reached cashflow breakeven status – which allows it to re-invest for more growth without generating profit (and paying tax). Hopefully that means it can dial down its expenditure if revenue is below earlier expectations.
Right from the beginning, one of the main selling points of Xero has been its ability to work from anywhere at any time. That’s very useful if you’re (probably) locked down in your house.
Its half-year result was solid with revenue growth of 32% and an increase of earnings before interest, tax, depreciation (EBITDA) of 91%. It also grew subscribers by 30% to just over 2 million.
I’m not expecting the second half to be as good as the first half for Xero, but it’s one of the businesses that will hopefully be less affected than most other software businesses, or indeed any ASX business.
Don’t forget that the Australian interest rate is now at record lows, which should mean that businesses are worth more than they otherwise would be.
I’m not looking to buy Xero shares today – there are plenty of shares that were sold off more heavily which could be a better buy. But with a 20% fall I think Xero is obviously better value than it was before and if you’ve been waiting to buy a few shares then today could be a decent opportunity.
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Motley Fool contributor Tristan Harrison 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.