Is the Xero (ASX:XRO) share price in the buy zone after its acquisition?

The Xero Limited (ASX:XRO) share price could be great value following its acquisition of Planday this week. Here’s what you need to know…

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Source: Xero

On Thursday the Xero Limited (ASX: XRO) share price tumbled lower with the rest of the tech sector despite the announcement of a new acquisition.

The cloud-based business and accounting platform provider’s shares fell 2.5% to $115.90.

This means the Xero share price is now trading almost 27% lower than its 52-week high.

Is this a buying opportunity?

One broker that sees the weakness in the Xero share price as a buying opportunity is Goldman Sachs.

In response to its acquisition of Planday, this morning the broker retained its buy rating and $157.00 price target on the company’s shares.

Based on the current Xero share price, this price target implies potential upside of 35% for its shares over the next 12 months.

What did Goldman say about the acquisition?

Goldman appears to believe the acquisition would be a meaningful step into Europe.

Its analysts commented: “We see the transaction as a potential meaningful step for XRO in (1) providing a beachhead for core accounting expansion in Scandinavia and Continental Europe where Planday currently operates (we previously estimated Denmark/ Norway/ Sweden / Germany and France have a combined subscriber/revenue TAM of 6.2mn/NZ$1.5bn), (2) building out its App ecosystem (post Waddle, Hubdoc etc.); and (3) driving Planday penetration through Aus/NZ/Other subscribers.”

Why is the Xero share price good value?

Goldman Sachs sees a lot of value in the Xero share price at the current level due to its belief that it has a very long runway for growth.

The broker explained: “Key pillars of our buy thesis are: (1) Xero has a long runway for cloud accounting growth (in existing and new markets); (2) can drive earnings through monetisation of its ecosystem; (3) has highly attractive unit economics; and (4) substantial barriers to entry at scale.”

“Overall, we believe this proposed acquisition is consistent with our positive view on Xero monetising its ecosystem and entering new geographies, with the FY21 result (13th of May) as the next key catalyst,” it added.

This could make it worth taking a closer look at Xero once the volatility in the tech sector eases.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Xero. 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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