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Is the Xero share price in the buy zone?

After the havoc wrought on the ASX by the rapid spread of the coronavirus throughout February and March, there have been some tentative signs of improvement more recently.

The S&P/ASX 200 Index (ASX: XJO) crashed almost 40% from its February high of 7197.2 points to just 4402.5 by mid-to-late-March, but it has so far recovered 22% to 5387.3 points as at the time of writing.

This means longer-term investors in some of the more popular ASX growth shares are finally starting to claw back a portion of the big losses they’d accumulated throughout March. Buy now, pay later fintech share and market darling Afterpay Ltd (ASX: APT) has surged back up to $22 a share after plummeting to a low of just $8.01 on 23 March. And IT company Appen Ltd (ASX: APX) has bounced almost 45% from the low of $15.70 it recorded on 13 March back up to $22.76.

While it’s almost guaranteed that there will be more volatile times ahead, this momentary pause in the bloodletting should give shareholders some time to gauge the health of their portfolios. And a group of investors who should be quite pleased with their current situation are shareholders in accounting software company Xero Limited (ASX: XRO).

Why the Xero share price has held up amid COVID-19

After collapsing from its all-time high of $90.22 on 18 February to well under $60 by late March, the Xero share price has recovered sharply and is back up to $78.10 as at the time of writing. This means Xero shares are currently only 13% off their peak price – which isn’t too bad considering how some other companies have performed.

The reason the Xero share price has been so resilient is down to its business model. Like other high-performing IT companies such as Altium Limited (ASX: ALU), Xero operates a subscription-based software-as-a-service business. It provides cloud-based accounting software to small business customers to help them manage their payroll, tax and other critical functions.

Because it is a fully online, cloud-based product, it is perfectly designed to help small to mid-sized businesses continue to operate during these difficult conditions. Its customers can easily access their accounting information from whatever location they are currently working from, and Xero can continue to provide customer support remotely. So there is really no change to its product functionality.

And particularly now that the JobKeeper legislation has passed Parliament, Xero’s software will continue to be in high demand throughout this period of social lockdown. Many small businesses that have been effectively put into economic hibernation by the government’s strict lockdown measures are still going to be required to manage their payroll and report information to the Australian Tax Office.

Foolish takeaway

In order to safeguard your portfolio against potential losses from the continuing coronavirus crisis, it is important to look for companies that provide an essential service. The lockdown measures imposed by the government to fight the spread of coronavirus are effectively ‘switching off’ entire sectors of the economy.

Companies operating in more ‘discretionary’ areas of the economy will struggle: most retail activity is going to be markedly subdued over the coming months, while many companies in the travel and tourism industries are going to find it incredibly difficult to survive at all.

With a product offering targeted specifically at small to medium-sized businesses – the exact part of the economy that the Federal government is hoping to prop up through its various stimulus packages – Xero is well placed to support the economy through this difficult period. And although its share price may not offer the same value it did a week or two ago, I believe it is still a great buy for those looking to strengthen their portfolios for the tough times ahead.

Where to invest $1,000 right now

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.

*Returns as of June 30th

Motley Fool contributor Rhys Brock owns shares of AFTERPAY T FPO and Altium. The Motley Fool Australia owns shares of AFTERPAY T FPO, Altium, Appen Ltd, and 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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