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Is the Xero share price a buy?

Is the Xero Limited (ASX: XRO) share price a buy? Investors didn’t think so yesterday as the Xero share price dropped 4.8% in reaction to the FY20 result.

Xero FY20 result

I thought the FY20 report was actually good from Xero, it’s just that investors were seemingly expecting even more from the result and outlook.

Xero reported that free cash flow increased by 320% to NZ$27.1 million. Net profit after tax (NPAT) came in at $3.3 million, an improvement from the NZ$27.1 million loss in FY19. As free cash flow grows it should mean investors are more willing to pay for a higher Xero share price over time.

Total subscribers rose by 26% to 2.285 million and average revenue per user increased by 2% to NZ$29.93. Operating revenue increased by 30% to NZ$718 million. Earnings before interest, tax, depreciation and amortisation (EBITDA) rose by 88% to NZ$137.7 million.

One of the most attractive parts to me was that the gross margin increased from 83.6% to 85.2%.

Subscriber number growth was good across the world. North American subscribers grew 24% to 241,000, UK subscribers grew 32% to 613,000, Australian subscribers grew by 26% to 914,000, New Zealand subscribers rose 12% to 392,000 and the rest of the world subscribers rose by 51% to 125,000.

Is the Xero share price a buy?

Xero said that whilst FY20 was strong, trading in early FY21 has been impacted by the coronavirus. Uncertainty meant it would be speculative for the company to say anything else about FY21 expectations.

However, the company did say that it still aims to be a long-term orientated, high-growth business. That’s a good sign, but obviously not surprising. 

After a share price fall of 5% for Xero, I think it looks a bit better at under $80. The question will be how many businesses will permanently fold as a result of the coronavirus crisis. How many subscribers will Xero lose from its total?

Keep in mind that the interest rate in Australia and New Zealand is now incredibly low. This should mean that growth is even more valuable. I’d be happy to buy a small parcel of Xero shares at this price, but I’d be wary about buying too much because of the high expectations built in at this level.

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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.

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