Shares in Xero Ltd (ASX: XRO) have been sold off recently, dipping more than 10% since the company delivered its first-half trading results last week.
But if the team at Macquarie are to be believed, that's just even more reason to buy, with Macquarie analysts confident the market has got this one wrong, and there's huge upside to be had.
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Solid set of results
Xero on Thursday reported revenue of NZ$1.2 billion, up 20%, and a 12% increase in adjusted EBITDA to NZ$350.9 million.
The company's Chief Executive Officer, Sukhinder Singh Cassidy, said the results "reinforce our ability to deliver as we continue to do what we said we would do, in line with our strategy''.
She went on to say:
We have demonstrated strong momentum, with our portfolio of large markets and our products contributing to our macro-resilient growth. We're executing our strategy effectively, keeping our customers at the heart of everything. We have delivered key wins against our 3×3 strategy, the successful early close of our acquisition of Melio, continued product velocity and solid go-to-market progress.
Ms Singh Cassidy also said the company stood to benefit greatly from advances in artificial intelligence, with the company seeing generative AI "as a significant opportunity to create more value for both our customers and internally at Xero''.
But while Ms Singh Cassidy was upbeat, investors sold off Xero shares on the day of the announcement and on Friday, pushing the share price down to $122.36.
Shares looking cheap
Macquarie analysts have run the ruler over the results, and it's fair to say they think the market has it wrong on this one.
They said in a note to clients that there was nothing in the result which "breaks the thesis", and "if anything, the US growth platform (Payments: Melio; Payroll Gusto) is in place earlier, and management is executing".
Xero bought Melio – a small to medium business billing platform – this year in a deal worth US$2.5 billion in cash and equity.
The Macquarie analysts said Melio was performing on track, and with the deal closing earlier than expected, the company could start to cross-sell products as soon as December.
Overall, the Macquarie analysts said Xero was executing well:
Management is walking the walk, making data-driven decisions that invariably lead to better capital allocation outcomes. We have high conviction in the beyond 12-month story, driven by the US opportunity. Gusto and Melio are the platform for US growth and management is executing quickly.
Macquarie has a 12-month price target of $230.30 on Xero shares, which would constitute an 88.2% total shareholder return if achieved. Xero does not pay dividends.
