Is the Xero share price a buy at $80?

Is the Xero Ltd (ASX: XRO) share price a buy at $80?

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Well, it's finally happened – shares of Xero Limited (ASX: XRO) have today crossed the $80 mark for the first time. Just after market open this morning, XRO shares crossed the $80 level – making a new all-time high of $80.86 before settling down slightly at the current share price of $80.12 (at the time of writing).

This latest move caps off an incredible year for Xero. In January, you could have picked up some XRO shares for just $42.95 – a share price that seems ludicrously cheap by today's levels. This cloud-based accounting software provider has now returned 87% to its lucky shareholders just this year alone, and 412% over the past five.

But is Xero a buy at these levels? I personally always get a little nervous about buying a share that's at an all-time high, let alone a share that's almost doubled in value over 11 months, so lets have a look.

What is Xero worth?

That's the 11.36 billion-dollar question (Xero's current valuation). In its most recently reported results, which were for the 6 months ending 30 September 2019, Xero reported a net profit of NZ$1.3 million on top of revenues of NZ$338.7 million.

If you're thinking it strange that an $11.36 billion company is making profits of NS$1.3 million, you're not alone.

But investors are clearly looking at the bigger picture here. This number also represents revenue growth of 32% year-on-year, which, if continued, would see an exponential growth in profits over the coming years. Seeing as Xero also reported that churn rates for its product only came in at 1.1%, it's highly likely that customer/subscriber numbers (already at over 2 million) will continue to snowball as well.

But at the end of the day, Xero's current share price is at least assuming these stellar growth rates will smoothly continue well into the future. Thus, the market is pricing the company at what its expected worth will be, not as it stands today.

Foolish takeaway

I love Xero as a company and agree that its growth trajectory is extremely pleasing and potentially highly lucrative. But I'm not willing to pay the price the market is asking of us at the current time.

It is extremely difficult to predict what a company may look like 5 or more years down the road, but this is exactly what's going on with the Xero share price today. I'll be waiting for a more myopic pricing opportunity on this one (although I may be waiting long time).

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Xero. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Share Market News

A man in a dark blue suit walks through an airport past floor-to-ceiling windows with a Qantas plane flying in the distance
Travel Shares

Up 16% this year, does Macquarie rate Corporate Travel Management shares a buy, hold or sell?

Does the travel stock have further to fly?

Read more »

Business women working from home with stock market chart showing per cent change on her laptop screen.
Opinions

1 month until ASX earnings season begins: how I'm preparing

It’s almost reporting time. Here’s what I’m looking at.

Read more »

Smiling man with phone in wheelchair watching stocks and trends on computer
Share Market News

5 things to watch on the ASX 200 on Tuesday

A good session is expected for Aussie investors today.

Read more »

a man sits at his desk wearing a business shirt and tie and has a hearty laugh at something on his mobile phone.
Opinions

Potential buys: 2 compelling ASX shares I like

These ASX shares have an exciting future.

Read more »

Man on a laptop thinking.
Share Gainers

Here are the top 10 ASX 200 shares today

Investors weren't in a good mood this Monday.

Read more »

A male investor sits at his desk looking at his laptop screen holding his hand to his chin pondering whether to buy Macquarie shares
Share Market News

How I'm preparing my ASX earnings season watchlist

It's almost that time of year again.

Read more »

group of friends checking facebook on their smartphones
Broker Notes

Macquarie tips 22% return for this ASX telco stock

This telco could be undervalued at current levels according to the broker.

Read more »

A male sharemarket analyst sits at his desk looking intently at his laptop with two other monitors next to him showing stock price movements
Broker Notes

Leading brokers name 3 ASX shares to buy today

Here's why brokers believe that now could be the time to snap up these shares.

Read more »