The Xero Limited (ASX: XRO) share price has started the month in a positive fashion.
In early afternoon trade, the cloud accounting companyâs shares are up 2% to $78.71.
Why is the Xero share price pushing higher?
As well as getting a boost from a rebound in the tech sector, the Xero share price has been given a lift from a bullish broker note.
According to a note out of Morgans, its analysts have initiated coverage on the company with an add rating and $90.25 price target.
Based on the current Xero share price, this implies potential upside of almost 15% for investors over the next 12 months.
What did the broker say?
Morgans notes that Xero has a huge market to grow into and opportunities to boost its earnings from value added services via its app store.
XRO has a significant runway for customer growth with <10% penetration of a 45m+ SMB Total Addressable Market (TAM). We see additional earnings upside from platform / ancillary value-added services and margin expansion.
The broker has, however, warned that it could be a bumpy road ahead for the Xero share price. This is due to the market having difficulty deciding on which valuation method to use for its shares given its propensity to reinvest in its growth.
Execution risk and time value of money are the key operational considerations. What valuation framework investors are prepared to use is the greatest unknown. The subjectivity of this will create share price volatility along the way.
‘A top tech exposure’
Nevertheless, the broker believes Xero is a high quality company, with strong growth potential in an industry with high barriers to entry.
It summarises:
XRO boasts strong customer advocacy, significant barriers to entry, scalability and LTV at ~7x CAC. It should continue to grow earnings/FCF above economic trend and is profitable and liquid. We rate it highly and it appears others do as well. A key risk is XRO trades on large short-term multiples. If we remove FY22F âinvesting for growthâ CAC, XRO trades on a ~2.2% FCF yield. Rising interest rates are a net negative for XROâs share price and growth companies. However, XRO should be a top tech exposure due its high quality.
The post Why this top broker just slapped a buy rating on Xero shares appeared first on The Motley Fool Australia.
Should you invest $1,000 in Xero Limited right now?
Before you consider Xero Limited, you’ll want to hear this.
Motley Fool Investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now… and Xero Limited wasn’t one of them.
The online investing service heâs run for over a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.* And right now, Scott thinks there are 5 stocks that are better buys.
See The 5 Stocks
*Returns as of June 1 2022
(function() {
function setButtonColorDefaults(param, property, defaultValue) {
if( !param || !param.includes(‘#’)) {
var button = document.getElementsByClassName(“pitch-snippet”)[0].getElementsByClassName(“pitch-button”)[0];
button.style[property] = defaultValue;
}
}
setButtonColorDefaults(“#0095C8”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#0095C8”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#fff”, ‘color’, ‘#fff’);
})()
More reading
- Here’s why ASX 200 tech shares are taking a beating on Wednesday
- Why is the Xero share price slipping 6% today?
- Why are ASX tech shares struggling today?
- Analysts tip big returns from these ASX growth shares
- What was the highest ever Xero share price?
Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Xero. The Motley Fool Australia has positions in and has recommended Xero. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
from The Motley Fool Australia https://ift.tt/YsTPJwf
Leave a Reply