Xero Limited (ASX: XRO) shares have opened the week strong today, banking a 2.5% rise to $77.19 at the time of writing. Even so, the Xero share price is still down 7.6% over the past week.
Xero is one of those shares that doesn’t seem to ever dip too much, so is this a rare buying opportunity?
Why has the Xero share price dipped?
Xero shares fell last week after the company released its FY20 results to the market. Xero reported some strong numbers, including a 26% increase in subscribers, a 30% increase in revenues and an inaugural profit of NZ$3.3 million. Free cash flow also increased by 320% to NZ$27.1 million.
But despite these numbers, investors were clearly expecting a little more out of this WAAAX market darling. Xero shares dipped in response, falling from nearly $84 on Wednesday to around $75 by the end of the week.
Does this mean Xero is a buy today?
Although the Xero share price has come off the boil, I’m still not convinced it’s at a compelling level today.
Xero is a company investors are pricing for a high growth future and it does have a long growth runway, for sure. Governments around the world are pushing for their taxpayers to switch to digital providers like Xero, which is a great long-term tailwind for the company to enjoy. Further, Xero has shown its product is extremely sticky, with most customers remaining on its platform after onboarding.
But with a current price-to-earnings ratio over 3,500, I think investors are seeing a little too much future potential based on current levels. Remember, this is a company that has just turned its first profit of NZ$3.3 million, yet has a market capitalisation of nearly $11 billion.
Furthermore, I still have concerns that Xero might run into increased competition which, in turn, may slow the astronomical rate of its subscriber growth. Intuit Inc. (NASDAQ: INTU) is one of Xero’s major competitors and has also been growing its market share in North America.
Perhaps on current prices, the market is treating Xero like a future monopoly in its cloud accounting space, rather than one of several strong players.
Xero is a high-quality company to be sure, and one I wouldn’t mind owning shares in at some point. But I think the current market environment is not one we should be making high-growth bets in. Therefore, today’s Xero share price is still a little out of my comfort zone. Call me if the Xero share price falls back to under $60 where it was a year ago and we might have a different conversation!
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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 and recommends Intuit. 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.