Xero (ASX:XRO) share price down 23%, is it a buy?

The Xero Limited (ASX:XRO) share price has fallen by 23% over the last three months. Is it a buy right now for growth portfolios?

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The Xero Limited (ASX: XRO) share price has dropped 23% over the last three months, could it be worth a buy right now?

What’s happened to the Xero share price recently?

Well, the Xero share price did end up 4% higher yesterday. Plus, it has had a strong performance during COVID-19 – the share price has gone up 59% over the last year (with the starting point a year ago not quite being the bottom of the COVID-19 crash).

However, plenty of ASX growth shares have seen their share prices decline during 2021. Other names to fall include Afterpay Ltd (ASX: APT) and CSL Limited (ASX: CSL).

Some brokers don’t think that the Xero share price is going to perform well over the next 12 months.

Broker Morgan Stanley has a share price target of $100 for Xero – this suggests it could fall 15% over the next year.

UBS has an even worse outlook for Xero shares, with a price target of $79.50. That means the broker believes it could drop by around a third over the next year, despite the large decrease already.

An acquisition

Xero recently made an acquisition called Planday. A workforce management platform with more than 350,000 employee users across Europe and the UK that simplifies employee scheduling, allowing businesses to forecast and manage their labour costs.

Not only will Xero be able to diversify its global revenue further, but the acquisition will allow Xero to strengthen its offering to clients and potentially cross-sell services. Xero will then take Planday’s offering into other markets where Xero operates, supporting Xero’s long-term growth plans.

This acquisition will cost €155.7 million and have a “modest” negative impact on Xero’s FY22 earnings before interest, tax, depreciation and amortisation (EBITDA) according to management.

Is the Xero share price a buy?

There is no doubt that the market thinks Xero is a quality business. It’s why it has a $16.6 billion market capitalisation, according to the ASX.

In the FY21 half-year result, it reported a number of growth metrics. It said that total subscribers grew by 19% to 2.45 million, annualised monthly recurring revenue grew by 15% to NZ$877.5 million. The gross profit margin improved from 85.2% in the prior year, to 85.7%. It generated NZ$120.7 million of EBITDA (up 86%), it made NZ$34.5 million of net profit after tax (NPAT) and NZ$54.3 million of free cash flow.

But no business is a buy at any price. UBS and Morgan Stanley don’t think the Xero share price will do very well over the next year.

Brokers like Citi think that there are question marks over the business when government support comes to a stop – it doesn’t think Xero is an obvious buy despite all of its qualities.

But Xero says that it’s positive on the outlook, saying:

Xero is a long-term orientated business with ambitions for high-growth. We continue to operate with disciplined cost management and targeted allocation of capital. This allows us to remain agile so we can continue to innovate, invest in new products and customer growth, and respond to opportunities and changes in our operation environment.

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Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia owns shares of AFTERPAY T FPO and 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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