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

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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%.

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

a young woman sits with her hands holding up her face as she stares unhappily at a laptop computer screen as if she is disappointed with something she is seeing there.
BNPL shares

Why did the Block share price have such a lousy time in FY22?

Last financial year was a transformative one for the now-ASX 200 tech giant.

Read more »

Rede arrow on a stock market chart going down.
Technology Shares

Why did the Appen share price sink 13% in June?

The Appen share price was sold off again in June...

Read more »

A man wearing a suit and sitting at his desk in front of his computer puts his hand to his forehead in frustration over the delayed Afrterpay takeover
Technology Shares

How did Xero shares do in the 2022 financial year?

The Kiwi software maker has been a favourite among investors over the past 5 years. But how has it done…

Read more »

a young boy dressed up in a business suit and tie has a cute grin and holds two fingers up.
Technology Shares

Top broker picks two ASX 200 tech shares for today’s economy

A top broker has revealed which two ASX 200 tech shares are likely to best withstand weaker demand in a…

Read more »

A young woman holds an open book over her head with a round mouthed expression as if to say oops as she looks at her computer screen in a home office setting with a plant on the desk and shelves of books in the background.
Technology Shares

Xref share price tumbles 19% despite record result for FY22

The HR tech company's share price plunged today despite stellar results.

Read more »

Arrows pointing upwards with a man pointing his finger at one.
Technology Shares

Why did the Fineos share price roar 15% higher today?

This tech share was a strong performer on Tuesday...

Read more »

chart showing an increasing share price
Broker Notes

Could an ‘immense’ opportunity mean the Megaport share price is now a buy?

Is Megaport a tech share to buy due to its immense growth opportunity?

Read more »

Two boys with cardboard rockets strapped to their backs, indicating two ASX companies with rocketing share prices
Technology Shares

These 2 ASX lithium stocks are charging up on Tuesday

What's happening with Global Lithium Resources and Lake Resources?

Read more »