The Xero (ASX:XRO) share price has fallen 20% since the start of the year. Is it a buy?

Xero is leading the ASX tech sector in share price declines. Is this a buying opportunity?

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Key points

  • ASX tech shares have been hit hard in 2022 amid a sector-wide correction
  • Rising bond yields have impacted the lofty valuations in the ASX tech basket
  • Xero leads the sector in losses and is down 20% this year to date
  • Yet, amid the tech sell-off, several brokers still name Xero as a buy

Shares in Xero Limited (ASX: XRO) are down by 1.5% to $115.96 in early trade on Thursday, extending the SaaS company’s deep run into the red in 2022. To date, the Xero share price has lost 20% of its value since January 1.

ASX tech shares have been hit hard in 2022 amid a sector-wide correction spurred on by rising yields on the long end of the US Treasury yield curve.

The rising yields have impacted the lofty valuations in the ASX tech basket, compounded by the inflation narrative circling markets right now.

For instance, the S&P/ASX All Technology index (ASX: XTX) – the benchmark for Australian tech-oriented companies – has fallen by more than 11% since January 1. Xero leads the sector in losses with its share price decline of 20.69%.

The online accounting and business service appears to track the index fairly closely, albeit reacting more sensitively to price dispersion within the broader sector. As such, any downside moves in the All-tech index are likely to be somewhat mirrored in the Xero share price.

Xero share price vs ASX All Tech Index single year performance

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Xero has struggled amid weakness in the sector, a changing interest rate regime, and the resulting shift in investor capital.

The Xero share price was near a 3-month high of $141.44 in late December. However, it immediately sank as we rolled into the new year.

But Xero isn’t the only ASX tech share to take a beating in the past couple of weeks. The entire tech sector is under pressure, which could mean some stocks are now ‘on sale’, given their outlook.

That’s why some of the leading brokers covering Xero are still bullish. They reckon there is still plenty of value to be had in 2022. Let’s take a look.

Is Xero a buy despite the weakness?

First of all, UBS has Xero as a hard sell and values the company at just $88. That bakes in a considerable amount of downside in the investment bank’s view.

Central to UBS’ thesis are assumptions around Xero’s expenditure that may compress margins and earnings performance, plus the company’s valuation.

UBS is joined by Macquarie, which expects Xero to underperform, but it tips a higher share price valuation of $130.

On the other hand, Credit Suisse has Xero as a buy and values the company at $160. The firm likes Xero’s growth outlook, particularly its average revenue per user (ARPU) metrics. For instance, Xero grew APRU by 5% in 1H FY22. Ultimately, Credit Suisse reckons this will expand operating cash flow and recurring revenue moving forward.

Goldman Sachs and Morgan Stanley are bullish on Xero as well. The brokers have a $158 and $148 share price target respectively.

So, amid the tech sell-off, there is still bullish sentiment to be found for the Xero share price, and at least 2 brokers advocate it as a buy right now.

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Motley Fool contributor Zach Bristow has no position in any of the stocks mentioned. 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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