Is the new leaner, meaner Xero stock a buy right now?

Is this tech stock a buy after announcing major cost reductions?

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Key points

  • Xero shares have taken off this week and are smashing the market
  • This has been driven by news that the company is making major cost reductions
  • Goldman Sachs believes Xero's shares can keep rising from here

The Xero Limited (ASX: XRO) share price is edging lower on Friday following a broad market selloff.

In late morning trade, the cloud accounting platform provider's shares are down 0.5% to $86.62.

Though, the Xero share price is still up over 10% this week thanks to a strong gain on Thursday.

This has been driven by news that the company is looking to make significant cost savings by reducing its workforce.

Does this make Xero a stock to buy now?

The good news is that one leading broker doesn't believe it is too late to jump on this new leaner, meaner Xero.

According to a note out of Goldman Sachs, its analysts have responded to the news by reiterating their conviction buy rating with an improved price target of $116.00.

Based on the current Xero share price, this implies potential upside of 34% for investors over the next 12 months.

What did the broker say?

Goldman continues to forecast strong revenue growth in the coming years thanks to structural tailwinds and its strong pricing power.

And thanks to these job cuts, the broker has boosted its earnings estimates meaningfully through to FY 2026. It explained:

We remain confident on the revenue outlook and forecast sustained growth (GSe +16% FY22-26E CAGR), given strong pricing power Xero has, the structural tailwinds driving cloud accounting adoption globally, and that Xero has somewhat protected its go-to-market functions in this restructure.

Although no trading update was provided, high frequency data suggest near-term subscriber trends remain solid. We lower our FY24-26 revenues by 1 to 3% on lower international sub growth (XRO vacancies are ANZ skewed currently at 80% of open roles vs. 56% staff). We upgrade FY24-26E EBITDA by +9-17% given the step change in opex, noting that we were +16 to +19% ahead of prior VA consensus.

Goldman ultimately expects this to lead to net profit after tax of:

  • NZ$21.1 million in FY 2023
  • NZ$78.4 million in FY 2024
  • NZ$122.9 million in FY 2025
  • NZ$179.7 million in FY 2026.

All in all, the broker continues to see Xero as the best tech stock to buy right now on the Australian share market. It concludes:

Overall we continue to see Xero as our top large cap technology pick, with the shift to profitability as a clear inflection point on several key debates: (1) priorities of new CEO in terms of scaling vs. profitable growth; (2) highlighting the scale and earnings potential of the business (masked since FY19 given breakeven FCF despite ARR > doubling); (3) supporting a multiple re-rate (noting the divergence in ASX profitable/unprofitable tech since 2021).

Motley Fool contributor James Mickleboro has positions in Xero. 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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