The Xero Limited (ASX: XRO) is outperforming its peers and the broader market after the stock was upgraded by a leading broker today.
The Xero share price is leading the WAAAX cohort of ASX tech darlings when it jumped 1.6% to $121.49 in the last hour of trade.
In contrast, the Appen Ltd (ASX: APX) share price gained 1.1% to $18.21, while the Altium Limited (ASX: ALU) share price, Afterpay Ltd (ASX: APT) share price and WiseTech Global Ltd (ASX: WTC) share price slumped between 1% and 2% each.
Xero share price defying the tech gloom
ASX technology shares have been on the nose lately as rising bond yields reduced appetite for high growth shares trading on expensive multiples.
But this could be the right time to be buying the Xero share price after Credit Suisse upgraded the cloud accounting software company to “outperform” from “neutral”.
“Following a share price rally in late CY20 that we believe disconnected from fundamentals, the XRO share price is now slightly below where it was at its mid-November result,” said the broker.
“Yet over that time, it has made an attractive acquisition, we have received further positive industry datapoints and we believe has continued another four months of ~20% revenue growth.”
Acquisition not a Xero-sum game
The attractive acquisition that Credit Suisse was referring to is workforce management platform, Planday. Xero paid €183.5 million for the business earlier this month.
“The acquisition provides a complementary offering across staff scheduling, time tracking, vacation management, payroll and reporting, and expands the TAM, which we estimate at >NZ$2.5bn across XRO’s existing markets,” added Credit Suisse.
This highlights an interesting question. Will other ASX tech darlings use their still high-flying share price to make acquisitions in order to justify their current valuations?
It’s a trend worth keeping a close eye on as most takeovers destroy value for the bidder.
Operating conditions may be better than expected
But the acquisition isn’t the only reason for Credit Suisse’s bullish view on the shares.
Industry trends, business closures and incorporations in key markets and upbeat commentary from key competitor Quickbooks are leading the broker to believe that Xero’s operating conditions are better than what some are expecting.
Investors won’t have to wait long to find out if Credit Suisse is right. The company will release its earnings results on 13 May and that could be a catalyst for the Xero share price.
How much is the Xero share price worth?
“We forecast group sales growth roughly in-line with the first half, which we believe is enough to support the share price at current levels,” said the broker.
“Looking forward, we believe a global rollout of Planday (likely in order of existing user base size) will be viewed positively although note localisation poses complexity and will require time, and competition is increasing in the space.”
Credit Suisse lifted its 12-month price target on the Xero share price to $136 from $119 a share.
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More reading
- Afterpay and Zip were among the most traded ASX shares last week
- How to counter the ASX 200’s Achilles heel
- ASX 200 up 0.4%: Bank shares lower, Xero shares upgraded
- ASX 200 crash anniversary: The most important lesson we’ve learned
- ASX 200 crash anniversary: 5 of the best performing shares of the last 12 months
Brendon Lau has no position in any of the stocks mentioned. Connect with me on Twitter @brenlau.
The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Appen Ltd and WiseTech Global. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. recommends Altium. The Motley Fool Australia owns shares of AFTERPAY T FPO, Altium, 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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