Where are Xero (ASX:XRO) shares headed in 2022?

Cloud software provider has rewarded its investors handsomely over the years, but that all came to a grinding halt in 2021. How will it fare in the new year?

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New Zealand accounting software provider Xero Limited (ASX: XRO) has served investors pretty well over the years.

Its shares first floated on the NZX, but even during its 9-year ASX life, the stock has returned more than 2,900%. The last 5 years has seen the shares rise 750%.

But 2021 was a bit rough.

Xero shares are 5.11% down on the year, closing Thursday at $140.88. The stock price flew as high as $157.99 and as low as $104.44 over 2021, taking shareholders on a stomach-churning ride.

So has the cloud software maker run out of steam? Is it one to have in your portfolio for the new year?

‘Best to be patient’

Medallion Financial managing director Michael Wayne told The Motley Fool that his clients were holding onto Xero.

“It has been a good performer over a long period of time. We are drawn to the capital-light and scalable software-as-a-service attributes of the business,” he said.

“We continue to be encouraged by the sticky nature of the product.”

However, he wouldn’t actively buy at the current prices. Perhaps one of the dips in 2022 will present an opportunity.

“We feel it best to be patient as the share price is prone to volatility,” he said. 

“All else remaining equal, we would look at buying around the $110 to $115 level.”

The Motley Fool analyst Chris Copley said much the same last month.

“There’s a lot of lofty expectations built into the [current] share price that investors should be wary of when investing in Xero,” he said in a video.

While its most spectacular years might be behind it, Copley reckoned it would still be a “market beater” in the long run.

“Its tail is long, which means I think it can get double-digit growth for a long period of time,” he said.

“You really do need to look well long term into the future for this one because even in 3 to 5 years, it’s still going to probably have quite a lofty multiple.”

Analysts divided on Xero shares 

According to CMC Markets, analysts don’t have a consensus view on Xero shares.

Eight out of 16 do currently rate them as a “strong buy”, but that’s somewhat cancelled out by 3 who classify the stock as a “strong sell”, and another 3 who recommend to hold.

The team at Credit Suisse likes the look of them heading into the new year. It rates Xero stocks as a buy, with a price target of $160, which is more than a 13% upside.

The Motley Fool’s Tristan Harrison reported Credit Suisse liked “the strong margins at Xero”.

“In the FY22 first half, its gross profit margin improved from 85.7% to 87.1%,” he wrote last week.

“Xero continues to see its annualised monthly recurring revenue (AMRR) increase, showing what the next 12 months of revenue could be. HY22 AMRR went up 29% to NZ$1.13 billion.”

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Motley Fool contributor Tony Yoo owns Xero. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns and has recommended Xero. The Motley Fool Australia owns 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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