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Down 13% in 9 days, is the Xero (ASX:XRO) share price now an undervalued buy?

Xero shares have fallen this year. Is it now a buy?
The post Down 13% in 9 days, is the Xero (ASX:XRO) share price now an undervalued buy? appeared first on The Motley Fool Australia. –

The Xero Limited (ASX: XRO) share price has dropped by around 13% in less than two weeks. Could the ASX tech share now be an undervalued buy?

There are plenty of ASX growth shares that have suffered over the past couple of weeks as investors reduce how much they are willing to pay for ASX shares that are growing quickly.

For example, since the start of the year the Altium Limited (ASX: ALU) share price has dropped around 10%, the WiseTech Global Ltd (ASX: WTC) share price has fallen around 8% and the Afterpay Ltd (ASX: APT) share price has dropped 8%.

After Xero’s recent decline, the last 12 months shows that the share price hasn’t really gone anywhere – shares have dropped by around 3% over the past year. However, the long-term has been full of gains. The last five years shows a gain of around 630% for the Xero share price.

After its decline, is the Xero share price an opportunity?

Opinions are mixed on the business.

In response to the FY22 first half result, different brokers have different opinions about the cloud accounting company. For example, the broker Credit Suisse currently rates the business as a buy with a price target of $160. That’s a potential upside of around 25% over the next year if the broker is right.

However, at the other end of the sentiment scale is UBS which actually rates Xero shares as a sell. The price target from UBS is $88. That implies a potential drop of Xero shares of around 31% this year.

Credit Suisse thinks that Xero is going to be able to grow its average revenue per user (ARPU) to help drive revenue upwards.

HY22 growth

In the first half of HY22, the ARPU increased by 5% to $31.32. This helped operating revenue grow by 23% to $505.7 million, annualised monthly recurring revenue went up 29% to $1.13 billion and the total lifetime value of subscribers went up 61% to $9.94 billion.

Xero said that while conditions varied across its markets, the strength of Xero’s performance “is evident in a number of Xero’s software as a service (SaaS) metrics, which trended positively over the period.”

UBS is expecting the ASX tech share to continue spending for growth, in areas like advertising and development

The ASX tech share continues to monitor the macroeconomic economic environment, and is positive about the critical role that small business will continue to play in the global economic recovery.

However, despite the good things the ASX tech share is achieving, UBS thinks that the Xero share price is overvalued

Whilst expenses are expected to rise as the business invests for growth, the gross profit margin continues to improve. In the first six months of its FY22, the Xero gross profit margin grew by 1.4 percentage point to 87.1%.

The post Down 13% in 9 days, is the Xero (ASX:XRO) share price now an undervalued buy? appeared first on The Motley Fool Australia.

Should you invest $1,000 in Xero right now?

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*Returns as of January 13th 2022

More reading

Here’s how the Afterpay (ASX:APT) share price performed in 2021

5 things to watch on the ASX 200 on Friday

Are Afterpay (ASX:APT) shares a buy before they convert into SQ2 shares?

Here’s why ASX 200 tech shares (ASX:XTX) outperformed today

Why Afterpay, Appen, Liontown, and Nickel Mines shares are surging higher

Motley Fool contributor Tristan Harrison owns Altium. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns and has recommended Afterpay Limited, Altium, WiseTech Global, and Xero. The Motley Fool Australia owns and has recommended Afterpay Limited, WiseTech Global, and Xero. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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