The ASX 200 tech stock to buy now before a massive revival

Has this software stock bottomed? Is it time to buy? One expert says yes.

| More on:
Man ponders a receipt as he looks at his laptop.

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

Former ASX technology darling Xero Limited (ASX: XRO) has taken investors on a wild ride over the past 18 months.

From its November 2021 peak, the software stock more than halved for significant periods in 2022.

But after its new chief executive promised cost cutting and a change in focus to turning a profit, 2023 has seen a revival in Xero's share price in excess of 31%.

Created with Highcharts 11.4.3Xero PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.com.au

But interest rates are still high and climbing, so is it a false dawn?

Fairmont Equities managing director Michael Gable had some thoughts:

'Upside risk to margin expansion'

Of course, a changed strategy to cost cutting and profit-making does mean Xero's former mission to grow at all costs will take a back seat.

That's not worrying Gable though.

"While there are investor concerns about the pace of subscriber growth under a leaner cost structure, we see scope for a further re-rating in the shares over the short to medium term," Gable said on the Fairmont blog

"There is upside risk to margin expansion beyond FY23 given that the company has several options available to dial down expenses in geographies/capabilities where revenue may be impacted."

Also, in this climate of inflation, Xero has an important lever to pull that's not available to every business.

"Xero retains strong pricing power, given the structural tailwinds driving cloud accounting adoption globally, that can continue to mitigate any impact from weaker subscriber growth, which is currently only limited to the UK and North American markets."

As relieved Australian mortgage holders saw just before Easter, interest rate rises seem to be nearing the end.

"The stabilising interest rates backdrop and improving US inflation data are likely to support a rotation back into high-quality growth stocks like Xero in the immediate term."

Xero share price 'still at a significant discount'

But after such a spectacular rise year to date, are Xero shares still good value if buying now?

It's a "yes" from Gable.

"Notwithstanding the recent recovery in the shares, at current levels, Xero is trading on a 1-year forward EV/sales multiple of ~9x," he said.

"This is still at a significant discount to the 6-year average of ~12x and at the low end of the trading range over this timeframe."

Technically, the Xero share price has broken through several upward barriers over the past five months.

"The gap up in early March on strong volume looks like a 'breakaway gap' and Xero should now trend higher."

Motley Fool contributor Tony Yoo has positions in Xero. 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.

More on Technology Shares

Man holding a calculator with Australian dollar notes, symbolising dividends.
Technology Shares

$10,000 invested in DroneShield shares 5 years ago is now worth…

You might be laughing all the way to the bank if you had done this.

Read more »

Happy woman working on a laptop.
Technology Shares

Up 60% since April, why this $40 billion ASX 200 tech stock remains a 'compelling buy' today

A leading expert believes this $40 billion ASX 200 tech stock has a lengthy growth runway ahead of it yet.

Read more »

A man holds his head in his hands, despairing at the bad result he's reading on his computer.
Technology Shares

DroneShield shares sink 7% despite big news

Let's see what's going on with this market darling on Thursday.

Read more »

A man activates an arrow shooting up into a cloud sign on his iPad.
Technology Shares

Up 25% since April, is it too late to buy Xero shares today?

A leading expert gives his verdict on the growth outlook for Xero shares.

Read more »

Man looking at digital holograms of graphs, charts, and data.
Technology Shares

2 amazing ASX tech shares I wish I'd bought last year

These tech companies are among the world’s best companies.

Read more »

A man in a business suit and tie places three wooden blocks with the numbers 1, 2, and 3 on them on top of each other.
Broker Notes

3 reasons to buy this booming ASX All Ords tech stock today

A leading broker forecasts more gains to come from this surging ASX All Ords tech stock.

Read more »

Man ponders a receipt as he looks at his laptop.
Technology Shares

Brokers rerate 3 leading ASX 200 tech stocks

Experts reveal their ratings on the ASX 200 tech sector's three biggest companies.

Read more »

Hologram of a man next to a human robot, symbolising artificial intelligence.
AI Stocks

Why Macquarie forecasts a big rebound for these 2 quality ASX All Ords tech stocks

Macquarie expects a big rebound is coming for these AI linked, ASX All Ords tech stocks.

Read more »