Xero share price rebounds: Is now the time to invest?

Xero shares could be great value after recent weakness according to one broker…

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Key points

  • Xero shares are rebounding on Friday morning
  • This follows the a recovery in the tech sector and the release of a bullish broker note out of Goldman Sachs
  • Its analysts see almost 50% upside for the company's shares

The Xero Limited (ASX: XRO) share price is rebounding this morning following a savage selloff on Thursday.

At the time of writing, the cloud accounting platform provider’s shares are up 4% to $80.11.

Why is the Xero share price rebounding?

The Xero share price is rebounding on Friday amid a recovery in the tech sector and the release of a bullish broker note.

According to a note out of Goldman Sachs, its analysts have retained their buy rating but trimmed their price target on the company’s shares by 11% to $118.00.

Based on the current Xero share price, this implies potential upside of 47% for investors over the next 12 months.

What did the broker say?

Goldman notes that Xero’s full-year results fell a touch short of its expectations on nearly all key metrics.

However, it still saw enough in the result to remain positive on the future. For example, its analysts highlight that price rises have not had a negative impact on churn levels.

Xero continues to scale in all markets, with +17% annualized sub growth and positive momentum in all geographies (albeit slightly weaker than GSe). Despite recent price rises, Xero also delivered a better than expected churn outcome, highlighting the stickiness of the customer (and pricing power that Xero has).

The broker also note the strong organic growth the company is delivering and the early progress with its app store. The latter is something which Goldman has previously suggested could be a big boost to future revenues.

Organic growth in platform revenues accelerated (+37%/+49% in 1H/2H22) driven by increased invoice payments (Mar-22 +41% vs. PcP), Payroll & initial app store fees (although still small). We estimate +$14mn of organic platform revenue was added in 2H, which if sustained, will contribute +2.1% of ARPU growth into FY23.

Finally, Goldman was pleased to see that management is guiding to improved margins in FY 2023. This is despite investing for growth.

Despite the companies global growth aspirations, positive FCF and $1.1bn of liquidity, Xero still guided to an improved margin in FY23 of c.300-400bps. Although needing to ensure an adequate ROI (particularly in the Americas – we estimate +21% underlying growth in 2H22 vs. +15% in 1H22) we are comfortable with this balance between short & long term focus, and note: (1) XRO proved its strong operating leverage in 1H21; (2) Positively, R&D spend is now in-line with marketing; (3) Improvement in all cost lines is expected over time.

Foolish takeaway

Based on the above, Goldman appears to see the recent weakness in the Xero share price as a buying opportunity. I would have to agree given its strong long-term growth outlook and the points outlined by the broker.

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. has positions in and has recommended Xero. The Motley Fool Australia has positions in and has recommended Xero. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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