Is the 11% drop in the Xero (ASX:XRO) share price a buying opportunity?

The Xero Limited (ASX: XRO) share price has come under significant pressure on Thursday.

In morning trade, the cloud-based business and accounting platform provider’s shares were down as much as 11.5% to $119.16.

At the time of writing, the Xero share price has recovered to be down 7.5% at $124.76.

Why is the Xero share price under pressure?

There have been a couple of catalysts for today’s weakness in the Xero share price.

The first is weakness in the tech sector following another selloff on the tech-focused Nasdaq index overnight.

At the time of writing, the S&P/ASX All Technology Index (ASX: XTX) is down a disappointing 2.5%.

What else is weighing on its shares?

Also weighing on the Xero share price today was the release of its full year results this morning.

For the 12 months ended 31 March, Xero reported an 18% increase in revenue to NZ$848.8 million and a 39% jump in earnings before interest, tax, depreciation and amortisation (EBITDA) to NZ$191.2 million.

While this was a strong result, particularly in the current environment, it has fallen short of the market’s expectations.

The consensus estimate was for revenue of NZ$854 million and EBITDA of NZ$228 million. This means Xero has fallen short of expectations by 0.7% and 16.2%, respectively, with its result.

Also potentially weighing on its shares was management’s commentary on its margins for next year. It is forecasting total operating expenses (excluding acquisition integration costs) as a percentage of operating revenue to be in a range of 80% to 85%. This compares to 70.4% during the first half of FY 2021.

And while the latter part of the range is higher than normal, the lower end of the range is roughly in line with previous years. Furthermore, it is worth noting that the first half figure was far lower than normal due to significant cost management during the height of the pandemic.

Is this a buying opportunity?

According to a note out of Goldman Sachs, its analysts appear to believe the weakness in the Xero share price is a buying opportunity.

While the broker hasn’t yet fully digested the result and updated its recommendation, it spoke positively about it.

Goldman said: “Overall we view the FY21 result as a positive, with Xero showing earlier than expected subscriber traction across all of its key international markets, but without sacrificing unit economics. As a result, we believe the accelerated investment is more than justified, given the enormous TAM the company is targeting.”

Goldman Sachs currently has a buy rating and $153.00 price target on its shares. Based on the current Xero share price, this implies potential upside of almost 23% over the next 12 months.

More reading

• Why are ASX tech shares like Afterpay (ASX:APT) crashing today?
• ASX 200 down 0.4%: Xero sinks, Telstra hit with $50m fine
• Xero (ASX:XRO) share price on watch after delivering strong growth in FY 2021
• 5 things to watch on the ASX 200 on Thursday
• Nasdaq slump: will ASX tech shares face selling pressure today?

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Xero. The Motley Fool Australia has no position in any of the stocks mentioned. 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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