Down 14% in 10 days, is the Xero (ASX:XRO) share price now an undervalued buy?

Xero shares have fallen this year. Is it now a buy?

| More on:
a woman wearing a close-sitting hat featuring wires and thick computer screen glasses clutches her computer monitor and looks shocked and disturbed as she reads old-fashioned computer text from the screen.

Image source: Getty Images

Key Points

  • The Xero share price has had a tough start to 2022
  • Some analysts think it’s an opportunity, while UBS believes it’s overpriced
  • Xero continues to see strong growth of its subscriber numbers

The Xero Limited (ASX: XRO) share price has dropped by around 13% in less than two weeks. Could the ASX tech share now be an undervalued buy?

There are plenty of ASX growth shares that have suffered over the past couple of weeks as investors reduce how much they are willing to pay for ASX shares that are growing quickly.

For example, since the start of the year the Altium Limited (ASX: ALU) share price has dropped around 10%, the WiseTech Global Ltd (ASX: WTC) share price has fallen around 13% and the Afterpay Ltd (ASX: APT) share price has dropped 8%.

After Xero’s recent decline, the last 12 months shows that the share price hasn’t really gone anywhere – shares have dropped by around 3% over the past year. However, the long-term has been full of gains. The last five years shows a gain of around 630% for the Xero share price.

After its decline, is the Xero share price an opportunity?

Opinions are mixed on the business.

In response to the FY22 first half result, different brokers have different opinions about the cloud accounting company. For example, the broker Credit Suisse currently rates the business as a buy with a price target of $160. That’s a potential upside of around 25% over the next year if the broker is right.

However, at the other end of the sentiment scale is UBS which actually rates Xero shares as a sell. The price target from UBS is $88. That implies a potential drop of Xero shares of around 31% this year.

Credit Suisse thinks that Xero is going to be able to grow its average revenue per user (ARPU) to help drive revenue upwards.

HY22 growth

In the first half of HY22, the ARPU increased by 5% to $31.32. This helped operating revenue grow by 23% to $505.7 million, annualised monthly recurring revenue went up 29% to $1.13 billion and the total lifetime value of subscribers went up 61% to $9.94 billion.

Xero said that while conditions varied across its markets, the strength of Xero’s performance “is evident in a number of Xero’s software as a service (SaaS) metrics, which trended positively over the period.”

UBS is expecting the ASX tech share to continue spending for growth, in areas like advertising and development

The ASX tech share continues to monitor the macroeconomic economic environment, and is positive about the critical role that small business will continue to play in the global economic recovery.

However, despite the good things the ASX tech share is achieving, UBS thinks that the Xero share price is overvalued

Whilst expenses are expected to rise as the business invests for growth, the gross profit margin continues to improve. In the first six months of its FY22, the Xero gross profit margin grew by 1.4 percentage point to 87.1%.

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

Before you consider Xero, you'll want to hear this.

Motley Fool Investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and Xero wasn't one of them.

The online investing service he’s run for over a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.* And right now, Scott thinks there are 5 stocks that are better buys.

*Returns as of January 13th 2022

Motley Fool contributor Tristan Harrison owns Altium. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns and has recommended Afterpay Limited, Altium, WiseTech Global, and Xero. The Motley Fool Australia owns and has recommended Afterpay Limited, WiseTech Global, and Xero. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Technology Shares