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Why it looks like a V-shaped recovery for the Xero (ASX:XRO) share price

Hands hold up the letter V, indicating a share price V-shaped recovery on the ASX
Image source: Getty Images

The Xero Ltd (ASX: XRO) share price looks to make a V-shaped recovery after falling as much as 30% from its record all-time highs of $155 back in late December 2020.

Its shares have since bounced ~30% and within 10% of record highs. 

What’s driving the Xero share price? 

Strength coming back to tech shares 

Surging bond yields and a rotation out of tech shares meant that the fundamentally sound Xero share price was swimming against the tide for most of late February and early March. 

With bond yields largely topping out for now and strength coming back into the broader market, tech shares have been able to breathe a sigh of relief. The S&P/ASX Information Technology (INDEXASX: XIJ) is up almost 10% in April, after falling more than 20% between 11 February and 9 March.

This has seen strength come back into leading ASX 200 tech shares such as Afterpay Ltd (ASX: APT) and Xero. 

Xero spending money to make money 

Xero went on a small shopping spree with the acquisition of workforce management platform, Planday, on 4 March for €155.7 million (~A$242 million) and e-invoicing business, Tickstar on 24 March for SEK 150 million (~A$23 million). 

On 8 March, Macquarie noted that Planday is expected to contribute around 10% of the group’s revenue over the longer term. It reduced FY22 earnings estimates by 2% to account for additional losses from the integration of Planday, while it boosted FY23 estimates by 17%. Despite the positive upgrade to earnings, the broker was neutral rated with a $120.00 target price. 

On the same day, broker UBS was also positive on the acquisition, highlighting that it will push Xero outside its core accounting software verticals and into employee and workforce management. The deal may also help Xero build direct relationships with employees and present future opportunities, said UBS. The broker retained a sell rating with a pessimistic $79.50 target price. 

Ord Minnett wasn’t too bullish on the company’s acquisition of Tickstar, noting that it does not see it as a material growth or earnings contributor in the medium term. On 25 March, it rated Xero shares as lighten with an $88 target price. 

Is the Xero share price too high? 

The Xero share price is currently trading above all but one broker target price. Even then, Morgan Stanley‘s target price of $140.00 is just less than 1% higher than its current price of $139.00. 

Broker target prices aren’t the be-all and end-all for where prices are going. If anything, Morgan Stanley’s commentary supersedes the black and white price target. The broker said that data checks and industry feedback point to continuing SME subscriber growth. The two recent acquisitions increase the broker’s convention in long-term subscriber, revenue, and earnings targets.

While $140.00 might be a key price point to watch, the broker clearly believes in the Xero share price in the long run.  

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Kerry Sun 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 owns shares of AFTERPAY T FPO. 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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