Top broker gives its verdict on the Xero (ASX:XRO) share price

The Xero Limited (ASX:XRO) share price is sinking 11% today following the release of its full year results. Is this a buying opportunity?

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The Xero Limited (ASX: XRO) share price was a particularly poor performer on Thursday.

The cloud accounting provider’s shares finished the day a massive 13% lower at $117.39.

Why did the Xero share price crash lower?

The Xero share price came under significant pressure following the release of its full year results.

For the 12 months ended 31 March, Xero reported an 18% increase in revenue to NZ$848.8 million and a 39% jump in earnings before interest, tax, depreciation and amortisation (EBITDA) to NZ$191.2 million.

Although its revenue was broadly in line with expectations, its operating earnings fell well short of consensus estimates.

In addition to this, management’s operating expenditure guidance for the year ahead was much higher than the market was expecting.

Combined with weakness in the tech sector, the Xero share price was always going to struggle during yesterday’s session.

Is this a buying opportunity?

Analysts at Goldman Sachs believe the weakness in the Xero share price is a buying opportunity.

This morning the broker reiterated its buy rating but trimmed its price target slightly to $151.00.

This implies potential upside of almost 29% over the next 12 months.

What did the broker say?

Commenting on the result, Goldman said: “In our view, Xero delivered a positive FY21 result, with revenue +2% ahead of GSe, as the company showed stronger sub growth across all key markets, without sacrificing unit economics. Sub momentum also improved across 2H21 (i.e. record March) and churn declined meaningfully (despite the growth).”

‘We believe this reflects the increased importance of Xero’s products through an accelerating period of global digitisation, with Xero meaningfully increased its investment into product/marketing as it looks to capitalize on this opportunity. This drove a -13% EBITDA miss, along with FY22 opex guidance that was well ahead of expectations (i.e. 82-87% of sales vs. GSe 77%).”

Xero share price valuation

And while the broker has downgraded its near term earnings forecasts to reflect Xero’s investments, it doesn’t impact its longer term estimates. As a result, there has been little change to its valuation.

It concluded: “Reflecting the FY21 result and strong sub momentum, we revise FY22-23 revenue +3 to +4%. However, given the step up in investment our EBITDA is -29%/-28%, but our FY30+ earnings are largely unchanged. Consequently, our XRO 12m TP is -1% to A$151 given a -1% DCF value (lost near-term cashflows) and -2% in our EV/GP (higher GP, offset by 2X multiple reduction, in-line with US SaaS peers). With strong subscriber and revenue trends we remain positive on Xero and retain our Buy, with +28% upside potential.”

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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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