Why is the Xero (ASX:XRO) share price tumbling 7% if the company is growing revenue?

The top line might look good but investors are punishing Xero today…

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The Xero Limited (ASX: XRO) share price is deep in the red today despite reporting revenue growth in the first half of FY22.

Shares in the cloud-based accounting software provider are down 7.34% to $136.47 at the time of writing.

It appears investors were expecting a higher growth rate for the company’s revenue during the six months ending 30 September. In turn, the market is punishing the Xero share price.

For context, the S&P/ASX 200 Index (ASX: XJO) is off by 0.51% in afternoon trading.

Let’s look beyond the top line and grasp exactly what happened with Xero in 1H FY22.

Prioritising growth ahead of profits hits Xero share price

The shift in company earnings from a $34.5 million profit in 1H FY21 to a $5.9 million loss in 1H FY22 might have put investors offside today. However, Xero managed to continue its double-digit revenue growth during the period.

Notably, the now 15-year-old company reported growth across all of its operating regions. The strongest was the rest of world (ROW) segment with growth of 72% year on year to NZ$45.9 million.

While most other segments also reported double-digit growth, North America posted a steady 5% increase year on year.

Overall, Xero’s revenue grew by 23% year on year to NZ$505.7 million for the quarter. Similarly, most other operational metrics indicated sustained growth within the business. For instance, total subscribers climbed 23% to 3 million.

Likewise, net subscriber additions accelerated, increasing by 272,000 compared to 168,000 in the previous corresponding period.

Despite this, the Xero share price is moving to the downside today. This possibly indicates that the market had expected more considering the level of investments made by the company.

The net loss was the product of increased investment across both sales and marketing, and product development. Making the difference even more significant, the past comparable period was one in which Xero held a high focus on cost management due to COVID-19 impacts.

Management commentary

Commenting on the company’s reinvestment strategy, Xero CEO Steve Vamos said:

We are committed to delivering the world’s most insightful and trusted small business platform to make life better for people in small business, their advisors and communities around the world. To support this, we continue to prioritise investment in product development and partnerships, and execute our strategy to meet our customers’ evolving needs in both the short and long term.

The announcement specifies that total operating expenses are forecast to be 80%-85% of revenue in FY22. This is in line with the second half of FY21.

Today’s news hasn’t helped the Xero share price get out of its 2021 rut. Shares are still down 5.6% year to date. Meanwhile, the benchmark index is up 9.7% since the beginning of the year.

Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and has recommended Xero. The Motley Fool Australia owns shares of and has recommended 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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