The Xero Limited (ASX: XRO) share price has taken a bit of a beating this week.
Investors have been selling this cloud accounting software platform provider's shares following the release of a trading update at its annual general meeting.
That update revealed that the company's growth in the key UK market has been somewhat underwhelming.
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Is the Xero share price weakness a buying opportunity?
According to a note out of Goldman Sachs, its analysts believe that this weakness has created an opportunity for investors to pick up shares.
In response to the update, the broker has retained its buy rating with a slightly trimmed price target of $111.00.
Based on the current Xero share price of $90.65, this implies potential upside of 22% for investors over the next 12 months.
What did the broker say?
Goldman has been busy updating its estimates to reflect the "subdued UK commentary at its AGM" and other data.
It commented:
Despite overall/market specific revenue being inline with internal forecasts, Xero's UK sub momentum has remained softer than its expectations (FY22 commentary implied an improved trajectory into FY23, i.e. > 130k).
Although limited in detail, it is clearly a disappointment for Xero to see continued UK weakness, given the overall importance of this market.
The broker believes this has been driven by changes to its strategy and an improved performance from rival Sage.
We believe this reflects: (1) Xero's decision to revise its go-to-market strategy, from broad based account managers into more specific roles (i.e. acquisition, upsell), alongside improving the geographic locations post covid; (2) recent KMP changes; and (3) an improved performance from incumbent Sage, who recently revised rev guidance higher.
The good news is that Goldman is confident that this is just a temporary issue and that the tide will turn soon.
Over time the Xero specific issues should resolve, noting improved UK High freq. data trends.
What else did Goldman say?
The broker also highlighted a few positives that investors might want to reflect on. It said:
Other XeroCon London takeaways: (1) Annual price rises introduced by Xero were less of a concern than expected, highlighting its pricing power; (2) Similarly the app store fee that was introduced in late 2021 did not appear to be an issue; (3) Prevalence of bridging software across Xero partner accountants was higher than we expected; and (4) MTD for income tax is a material subscriber opportunity from Apr-2024, supporting the launch of XeroGo at the conference.
All in all, this gives Goldman the confidence to retain its bullish view on the Xero share price.
