Xero Limited (ASX:XRO), is a AU$4.72B mid-cap, which operates in the software industry based in New Zealand. Technology has become a vital component of every industry, bringing unprecedented opportunities for growth, along with challenges and competition from traditional and emerging areas. Innovations such as augmented and virtual reality, blockchain, machine learning and autonomous vehicles are paving the way for tech sector growth and branching out into new applications. Tech analysts are forecasting for the entire software tech industry, a strong double-digit growth of 15.35% in the upcoming year , and a whopping growth of 71.40% over the next couple of years. Not surprisingly, this rate is more than double the growth rate of the Australian stock market as a whole. An interesting question to explore is whether we can we benefit from entering into the tech sector right now. In this article, I’ll take you through the tech sector growth expectations, and also determine whether Xero is a laggard or leader relative to its tech sector peers. View our latest analysis for Xero
What’s the catalyst for Xero’s sector growth?
US-based mega-competitors have been, and continue to be, the key drivers of industry growth. Many tech companies are repositioning themselves by focusing on high-growth areas such as IBM’s artificial intelligence play in Watson and Adobe’s shift to marketing its product for cloud computing. In the past year, the industry delivered growth in the teens, beating the Australian market growth of 5.97%. Xero leads the pack with its impressive earnings growth of 44.13% over the past year. Furthermore, analysts are expecting this trend of above-industry growth to continue, with Xero poised to deliver a 72.20% growth over the next couple of years compared to the industry’s 15.35%. This growth may make Xero a more expensive stock relative to its peers.
Is Xero and the sector relatively cheap?
The software tech industry is trading at a PE ratio of 31.83x, higher than the rest of the Australian stock market PE of 17.63x. This illustrates a somewhat overpriced sector compared to the rest of the market. However, the industry did return a higher 20.78% compared to the market’s 11.38%, which may be indicative of past tailwinds. Since Xero’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge Xero’s value is to assume the stock should be relatively in-line with its industry.
Next Steps:Xero’s industry-beating future is a positive for investors. If Xero has been on your watchlist for a while, now may be the time to enter into the stock, if you like its growth prospects and are not highly concentrated in the tech industry. However, before you make a decision on the stock, I suggest you look at Xero’s fundamentals in order to build a holistic investment thesis.
- Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
- Historical Track Record: What has XRO’s performance been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Xero? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!