Xero (ASX:XRO) share price sinks: Citi says buy the dip

Time to buy Xero shares?

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The Xero Limited (ASX: XRO) share price was a poor performer last week.

The cloud accounting platform provider’s shares dropped a disappointing 6% over the period to end at $142.26.

Why did the Xero share price tumble?

Investors were selling down the Xero share price last week after its half year results fell short of expectations.

For the six months ended 30 September, Xero reported a 23% increase in operating revenue to NZ$505.7 million but a 19% decline in EBITDA to NZ$98.1 million.

The former was softer than the market was expecting, which means it’ll need a big second half to reach consensus estimates. Management blamed this partly on COVID-19 lockdowns.

Is this a buying opportunity?

The team at Citi believe investors should be buying the Xero share price dip.

While its analysts acknowledge that the first half result was weaker than expected, it saw enough to upgrade the company’s shares.

According to the note, the broker has upgraded its shares to a buy rating and lifted the price target on them to $160.00.

Based on the current Xero share price, this implies potential upside of 12.5% for investors.

What did Citi say?

Citi commented: “Xero’s core accounting growth in 1H22 was a bit weaker than expected (partly a function of lockdowns) and North American subscriber growth missed our expectations. However, with AMRR growth accelerating to 29% from 17% in FY21 (26% excl. acquisitions), we upgrade to Buy ($160 target price) as we expect solid growth over the medium term as Xero increases penetration of existing markets (~18% penetration excl. North America), enters new markets (e.g. Europe) and increases ARPU. Our Buy call is not dependent on success in the US, with our forecasts assuming 2.2 million subs in North America in FY31e (~7% penetration).”

Should you invest $1,000 in Xero right now?

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*Returns as of January 13th 2022

Motley Fool contributor 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 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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