Should You Investigate Xero Limited (ASX:XRO) At AU$84.78?

Published
June 02, 2022
ASX:XRO
Source: Shutterstock

While Xero Limited (ASX:XRO) might not be the most widely known stock at the moment, it saw a decent share price growth in the teens level on the ASX over the last few months. With many analysts covering the mid-cap stock, we may expect any price-sensitive announcements have already been factored into the stock’s share price. But what if there is still an opportunity to buy? Let’s examine Xero’s valuation and outlook in more detail to determine if there’s still a bargain opportunity.

View our latest analysis for Xero

What's the opportunity in Xero?

According to my valuation model, the stock is currently overvalued by about 30%, trading at AU$84.78 compared to my intrinsic value of A$65.40. This means that the buying opportunity has probably disappeared for now. But, is there another opportunity to buy low in the future? Since Xero’s share price is quite volatile, this could mean it can sink lower (or rise even further) in the future, giving us another chance to invest. This is based on its high beta, which is a good indicator for how much the stock moves relative to the rest of the market.

Can we expect growth from Xero?

earnings-and-revenue-growth
ASX:XRO Earnings and Revenue Growth June 2nd 2022

Future outlook is an important aspect when you’re looking at buying a stock, especially if you are an investor looking for growth in your portfolio. Buying a great company with a robust outlook at a cheap price is always a good investment, so let’s also take a look at the company's future expectations. In Xero's case, its revenues over the next few years are expected to grow by 84%, indicating a highly optimistic future ahead. If expense does not increase by the same rate, or higher, this top line growth should lead to stronger cash flows, feeding into a higher share value.

What this means for you:

Are you a shareholder? XRO’s optimistic future growth appears to have been factored into the current share price, with shares trading above its fair value. However, this brings up another question – is now the right time to sell? If you believe XRO should trade below its current price, selling high and buying it back up again when its price falls towards its real value can be profitable. But before you make this decision, take a look at whether its fundamentals have changed.

Are you a potential investor? If you’ve been keeping an eye on XRO for a while, now may not be the best time to enter into the stock. The price has surpassed its true value, which means there’s no upside from mispricing. However, the optimistic prospect is encouraging for XRO, which means it’s worth diving deeper into other factors in order to take advantage of the next price drop.

Keep in mind, when it comes to analysing a stock it's worth noting the risks involved. For example - Xero has 1 warning sign we think you should be aware of.

If you are no longer interested in Xero, you can use our free platform to see our list of over 50 other stocks with a high growth potential.

Discounted cash flow calculation for every stock

Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.

Make Confident Investment Decisions

Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.

About ASX:XRO

Xero

Xero Limited, together with its subsidiaries, operates as a software as a service company in New Zealand, Australia, the United Kingdom, and internationally.

Reasonable growth potential and slightly overvalued.