Do experts think the Xero share price is a buy?

Brokers weigh in with their thoughts on the cloud accounting platform provider.

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Key points

  • The Xero share price has fallen heavily in 2022, down around 40%
  • Xero recently reported its FY22 result, showing further growth
  • Brokers are mixed on whether today’s price is good value

The Xero Limited (ASX: XRO) share price has seen a lot of volatility this year. Could the ASX tech share be an opportunity after its decline?

Since the beginning of the 2022 calendar year, Xero shares have fallen almost 40%. But they have recovered since 12 May – up 18% since then.

What has happened to the Xero share price?

ASX shareholders — including those of Xero — are facing uncertainty due to factors such as the Russian invasion of Ukraine, strong inflation, and the prospect of higher interest rates by central banks, including the Reserve Bank of Australia (RBA).

But earlier this month, Xero also reported its FY22 full-year result. Investors pay particular attention to the progress a business has made and its expectations for the near future, which can impact the Xero share price.

The company reported further growth. Subscribers rose by 19% to 3.27 million, which helped operating revenue rise by 29% to NZ$1.1 billion.

Average revenue per user (ARPU) went up by 7% to NZ$31.36 and the annualised monthly recurring revenue (AMRR) grew by 28% to NZ$1.23 billion.

The company’s growing scale led to the gross profit margin increasing by a further 1.3 percentage points to 87.3%.

Ongoing focus on investing for growth

Xero is focused on a number of areas to keep growing. One of the key areas is growing its customer numbers with marketing spending, which the company said had a positive impact on subscriber additions and brand awareness across its global operations.

The ASX tech share said it has taken the opportunity to develop a range of new approaches to engage with customers and partners, such as its recently announced partnership with FIFA women’s football.

Xero is also investing heavily in product design and development, which increased by 49% to $372 million, representing 33.9% of operating revenue. Management said investments in product and technology are aligned with Xero’s long-term ambitions, such as production localisation in a number of international markets and future innovation in areas such as platform, ecosystem, and integration of acquisitions.

Xero CEO Steve Vamos said:

Our strong revenue and subscriber growth gives us confidence to continue to invest for growth consistent with our long-term strategy.

Our performance reflects the quality of our customer and partner relationships as more people realise the benefits that cloud accounting and digital tools provide.

We are committed to delivering the world’s most insightful and trusted small business platform by focusing on driving cloud accounting adoption, growing the small business platform and building for global scale and innovation.

We continue to prioritise investment in building products and growing partnerships by investing cash generated to help deliver our strategy, drive long-term growth and meet customer needs.

Is the Xero share price good value?

Brokers are somewhat mixed on the business.

Citi thinks Xero is a buy, with a price target of $108, with one positive being the potential growth in the UK as businesses go digital with taxation compliance.

However, UBS rates the business as a sell with a price target of just $70. The broker noted that cash flow is low (Xero made NZ$2 million of free cash flow in FY22). However, it also noted that changes in the foreign currency could help revenue in FY23.

The Xero share price closed at $90.48 on Monday.

Citigroup is an advertising partner of The Ascent, a Motley Fool company. Motley Fool contributor Tristan Harrison 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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