Xero Ltd (ASX: XRO) shares have come roaring back since hitting a multi-year closing low of $70.42 on 13 April.
On Tuesday, shares in the S&P/ASX 200 Index (ASX: XJO) business and accounting software provider closed up 1%, changing hands for $83.00 each. That sees the share price up 18% in just seven trading days.
Still, Xero shares have a long way to go before matching or exceeding the all time closing high of $194.21, notched on 24 June.
As you may know, Xero, like many tech stocks, came under heavy pressure amid investor concerns that artificial intelligence, or AI, could take a big bite out of software as a service (SaaS) providers' business models.
You may have heard this referred to as the SaaSpocalypse.
But when it comes to Xero, Bell Potter Securities' Christopher Watt believes these concerns "are overblown" (courtesy of The Bull).
Here's why Watt expects the ASX 200 tech stock is well-positioned to outperform.
Image source: Getty Images
Should you buy Xero shares today?
"This accounting software provider remains a high-quality business, underpinned by strong subscriber growth and increasing average revenue per user through product expansion," Watt said, citing the first reason he has a buy rating on Xero shares.
"Xero continues to improve operating leverage as the business scales up globally, with margins expected to expand in response to cost discipline," he said, summing up the second reason.
Then there's the company's strong earnings growth outlook.
According to Watt:
Importantly, Xero is transitioning from a growth-at-all-costs model to one focused on profitability and cash generation, which should support a re-rating in valuation. With a large addressable small-to-medium sized market and increasing penetration of digital accounting, Xero is well positioned to deliver sustained double-digit earnings growth.
Near term catalysts include further margin upgrades and continued execution across key regions.
And the fourth reason Watt is bullish on this ASX 200 tech stock is the big, potentially unwarranted, selldown in recent months amid investor fears over the rise of AI.
"We believe concerns related to the impact of artificial intelligence are overblown, and the share price sell-off presents a compelling buying opportunity," he concluded.
What's the latest from the ASX 200 tech stock?
The last announcement deemed price sensitive to Xero shares was a company market update, released on 3 February.
Among the highlights, the ASX 200 tech stock reported that more than two million Xero subscribers were now benefitting from AI features, with 300,000 using new GenAI tools.
Around the world, Xero said that more than four million customers were using its platform.
