Xero Limited (ASX: XRO) shares had a day to forget on Thursday.
The cloud accounting platform provider's shares were sold off after its half-year results release.
Although the company reported a 90% jump in EBITDA, this was still short of the market's expectations.
Are Xero shares a buy after the sell-off?
While yesterday's selloff was disappointing, analysts at Goldman Sachs believe investors should be taking advantage of it to load up on Xero shares.
But first, let's take a look at what the broker is saying about yesterday's update. On the positives, it said:
(1) ARPU exit run-rates were solid with pricing tailwinds to flow through in 2H. As such, we expect to see strong ARPU growth (GSe +8% ANZ, +11% International) in FY24, giving Xero greater capacity to reach its opex target (re-iterated at around 75%); (2) Continued FCF margin improvement at 13.3% in 1H24 (vs. 2.4% 1H23), and looking to Rule-of-40 (GSe Rev growth + FCF margin) as a performance measure, we forecast 36% in FY24E; (3) Despite high cloud accounting penetration, ANZ continues to perform strongly adding +139k subs and +9% (CC) ARPU. RoW/NA seeing solid momentum with further detail provided on Xero's US strategy noting a continued focus on investing at a reasonable rate relative to top line growth.
Offsetting some of these positives, though, were a few negatives according to Goldman. It explains:
(1) Opex as a % of sales at 79.1% in 1H24 higher than GSe (75.3%) reflecting cost seasonality (i.e. timing of XeroCon, FIFA Women's World Cup sponsorship). Given the unchanged opex target, Xero needs to achieve a ratio in the low 70s% (GSe 72%) in 2H; (2) UK subscriber net adds subdued (+40k vs. GSe prior +55k) due to softer MTD demand with limited commentary around 2H outlook; (3) Platform revenue growth decelerating to +20% YoY vs. +27% 1H23 (CC), albeit strong growth in payments.
The sum of the above is a reasonably minor revision to its revenue and earnings estimates. The broker adds:
We revise FY24-FY26E revenue by -1-2% and EBITDA by -3-5%, primarily reflecting lower subscriber numbers. We forecast an expense ratio of 75.2% in FY24 and have this trending down.
Big returns ahead
Goldman has reiterated its conviction buy rating on Xero's shares with a trimmed price target of $141.00.
Based on yesterday's close price of $100.47, this implies a potential upside of 40% for investors.
