The Xero Limited (ASX: XRO) share price is out of form again on Tuesday and dropping lower.
At the time of writing, the business and accounting platform provider’s shares are down 3% to $131.97.
This means the Xero share price is now down 10% since the start of FY 2021 and almost 17% from its all-time high.
Why is the Xero share price dropping lower?
Investors have been selling Xero and other tech shares recently and rotating into value and cyclical stocks.
Is this a buying opportunity?
One broker that would see the weakness in the Xero share price as a buying opportunity is Goldman Sachs.
Late last year the broker initiated coverage on the company with a buy rating and $157.00 price target.
Based on the latest Xero share price, this price target implies potential upside of 19% for its shares over the next 12 months.
Why does Goldman like Xero?
Goldman Sachs is a big fan of the company’s cloud-based accounting software. It notes that the value proposition for its SME customers includes its ease-of-use, a single source of “truth” (for the business & their accountant), and its ecosystem of 1,000+ best-in-class apps that provide a broad range of software solutions.
It also points out that Xero has a total addressable market (TAM) of NZ$14 billion per annum at present across its key markets. Based on its FY 2020 performance, this means that it has only penetrated 4.6% of this market.
This in itself gives it a long runway for growth. However, the broker sees opportunities for this TAM to grow even larger.
It explained: “We estimate Xero has a core TAM of NZ$14bn p.a. across its key markets (4.6% penetrated in FY20). However as it broadens and monetizes its app ecosystem, and expands into new geographies, we estimate this will open a further NZ$62bn in addressable TAM, providing a multi-decade runway for strong revenue growth.”
“Combined with attractive unit economics at maturity (GSe 40% EBIT margins), we believe the long-term earnings opportunity for Xero is material,” it concluded.
All in all, this could make it worth taking a closer look at Xero’s shares after their poor start to the year.
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James Mickleboro has no position in any of the stocks mentioned. 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. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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