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Is the Xero Ltd share price a buy at $100?

ASX shares new high represented by boy standing on ladder against the backdrop of a cloudy sky

It’s happened!

The Xero Limited (ASX: XRO) share price this week burst through the $100 per share mark, closing Wednesday at $100.02 per share. It is a big milestone for the New Zealand tech company with a share price rise of 25% so far in 2020. At the time of writing, the Xero share price is trading at $102.

Let’s put the Xero share price rise into perspective

To put Xero’s share price rise into perspective, the S&P/ASX All Technology Index (ASX: XTX), which includes Xero, has risen 26.9% so far this year. So Xero’s share price rise is similar to its peers.

The All Technology Index, which can be tracked through the exchange-traded fund (ETF) Betashares S&P/ASX Australian Technology ETF (ASX: ATEC), currently includes 50 companies. Xero shares make up approximately 10.4% of the index, while the Afterpay Ltd (ASX: APT) share price makes up a chunky 20.4% of the index. The top 5 companies that make up the index are:

How does Xero’s $14.2 billion valuation compare?

Xero currently trades at a market capitalisation of around $14.2 billion dollars, which means it has a price-to-sales ratio of around 21x. This is certainly well above the company’s own average over the last five years of closer to 12x sales,according to data from ycharts.com. It is also substantially higher than the All Technology Index average price-to-sales ratio of 6.7x.

The price-to-sales multiple alone is not necessarily a fair reflection of the company’s valuation. But it does tell me that an investor buying Xero shares at $100 today is assuming a surge in revenue growth in years ahead to justify paying so much more than in previous years.

Should you buy Xero shares at $100?

I own Xero shares and I’ve written before that I think Xero has the potential to become one of the world’s best companies. The platform that Xero provides is evolving from an accounting service to a full suite of products designed to help small businesses and is growing an incredible switching cost moat.

Still, I can’t help feeling that at $100 per share, there is very little margin for error in the Xero share price. In my view, Xero’s financial performance still has some way to go before justifying the $100 mark and it’s likely that Xero has simply been caught up in the hot demand for consumer-tech stocks. 

As Motley Fool Australia Director of Research Scott Phillips wrote recently about Apple (NASDAQ: AAPL): “Where the ‘safe stocks’ used to be banks and oil companies, they’re quickly being supplanted by big, well known, consumer-tech stocks.”

In this kind of environment, it’s best to proceed with caution.

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Regan Pearson owns shares of Xero. You can follow him on Twitter @Regan_Invests.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Apple. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Xero. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended Apple, REA Group Limited, and SEEK Limited. 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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