The Xero (ASX:XRO) share price is down 10% in 2021: Is this a buying opportunity?

The Xero Limited (ASX:XRO) share price is down 10% so far in 2021. Here's why this could be a buying opportunity for investors…

| More on:
Woman in mustard yellow blouse on laptop holds both hands out to either side with graphic illustration of question marks above them

Image source: Getty Images

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

The Xero Limited (ASX: XRO) share price is out of form again on Tuesday and dropping lower.

At the time of writing, the business and accounting platform provider's shares are down 3% to $131.97.

This means the Xero share price is now down 10% since the start of FY 2021 and almost 17% from its all-time high.

Why is the Xero share price dropping lower?

Investors have been selling Xero and other tech shares recently and rotating into value and cyclical stocks.

This has led to the S&P/ASX All Technology Index (ASX: XTX) sinking 5.5% since the turn of the year, compared to a 1.7% gain by the benchmark S&P/ASX 200 Index (ASX: XJO).

Is this a buying opportunity?

One broker that would see the weakness in the Xero share price as a buying opportunity is Goldman Sachs.

Late last year the broker initiated coverage on the company with a buy rating and $157.00 price target.

Based on the latest Xero share price, this price target implies potential upside of 19% for its shares over the next 12 months.

Why does Goldman like Xero?

Goldman Sachs is a big fan of the company's cloud-based accounting software. It notes that the value proposition for its SME customers includes its ease-of-use, a single source of "truth" (for the business & their accountant), and its ecosystem of 1,000+ best-in-class apps that provide a broad range of software solutions.

It also points out that Xero has a total addressable market (TAM) of NZ$14 billion per annum at present across its key markets. Based on its FY 2020 performance, this means that it has only penetrated 4.6% of this market.

This in itself gives it a long runway for growth. However, the broker sees opportunities for this TAM to grow even larger.

It explained: "We estimate Xero has a core TAM of NZ$14bn p.a. across its key markets (4.6% penetrated in FY20). However as it broadens and monetizes its app ecosystem, and expands into new geographies, we estimate this will open a further NZ$62bn in addressable TAM, providing a multi-decade runway for strong revenue growth."

"Combined with attractive unit economics at maturity (GSe 40% EBIT margins), we believe the long-term earnings opportunity for Xero is material," it concluded.

All in all, this could make it worth taking a closer look at Xero's shares after their poor start to the year.

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.

More on Share Fallers

A male investor wearing a blue shirt looks off to the side with a miffed look on his face as the share price declines.
Share Fallers

Why DroneShield, Gentrack, Metals X, and Northern Star shares are tumbling today

These shares are ending the week in the red. But why?

Read more »

A man sits in despair at his computer with his hands either side of his head, staring into the screen with a pained and anguished look on his face, in a home office setting.
Share Fallers

Why Bapcor, Boss Energy, Macquarie, and Novonix shares are falling today

These shares are having a tough session on Thursday. But why?

Read more »

Stock market crash concept of young man screaming at laptop on the sofa.
Share Fallers

Guess which ASX 200 stock just crashed 31% on slumping sales

The $1.3 billion ASX 200 stock is getting hammered today.

Read more »

Frustrated stock trader screaming while looking at mobile phone, symbolising a falling share price.
Share Fallers

Why CBA, Inghams, Praemium, and Strike Energy shares are tumbling today

These shares are having a tough time on Tuesday. But why?

Read more »

Man with a hand on his head looks at a red stock market chart showing a falling share price.
Share Fallers

Why Brightstar, Eagers Automotive, Regis Resources, and Westpac shares are sinking

These shares are starting the week in the red. But why?

Read more »

Disappointed man with his head on his hand looking at a falling share price his a laptop.
Share Fallers

Why 29Metals, Atlas Arteria, DroneShield, and Yancoal shares are falling today

Let's see why these shares are ending the week in the red.

Read more »

Shot of a young businesswoman looking stressed out while working in an office.
Share Fallers

Why 29Metals, CAR Group, DroneShield, and Santana Minerals shares are falling today

These shares are missing out on the good times on Thursday. But why?

Read more »

Frustrated stock trader screaming while looking at mobile phone, symbolising a falling share price.
Share Fallers

Why Imricor, Imugene, Newmont, and Pepper Money shares are falling today

These shares are having a tough time on hump day. But why?

Read more »