Xero Shares have been growing revenues at over 18% year on year since 2016, whilst the rate has slowed. We take a look at Should I Buy Xero Shares in 2021?

ASX:XRO Share Price

The Xero 5-year share price performance is up a massive 660% to todays price of $142.92, the 52-week range is $87.65-157.99. The shares are currently trading towards the top end of the 52 week range. Xero has a current market cap of $21.20billion. Whilst Xero had a slight retracement during the pandemic, the shares quickly recovered and continued the multi-year upwards trend.

Should I Buy Xero Shares: About

Xero provides a cloud based accounting software to business. The company has been operating since 2006 and has around 2.7million subscribers globally.

Should I Buy XERO Shares
Xero Subscriber Growth Since 2010

From the company website: “We started Xero to change the game for small business. Our beautiful cloud-based accounting software connects people with the right numbers anytime, anywhere, on any device. For accountants and bookkeepers, Xero helps build a trusted relationship with small business clients through online collaboration. We’re proud to be helping over 2.7 million+ subscribers worldwide transform the way they do business. And we’re just getting started.”

Should I Buy XERO Shares: Investor Sentiment

After surveying 112 Investors about their current ASX:XRO shares sentiment: BUY-HOLD-SELL, as well as their target price over the next 12-months here are the results;

Investor Sentiment Survey Results – XERO Shares

The results from this survey show there is currently a strong Hold investor sentiment on XERO Stock shares. So how much are XERO shares worth? Let’s get into it.

Prophets Trusted Affiliate Partner
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Insider Ownership And Trading

XERO is largely owned by the General Public with 56% ownership. Institutions own 28.6%, and individual insiders own 13.3%. It’s great to see a decent segment of ownership in the company is by individual insiders. The Rod Drury and Andrew Winkler owns 8.04% and 4.5% of the company respectively, with other key management people owning some smaller portions.

Ownership Breakdown of XERO

Key ownership stakes in the company are listed below

OwnershipNameSharesCurrent Value
8.04%Rod Drury11,914,789NZ$1.7b
4.5%Andrew Winkler6,675,990NZ$954.1m
3.74%BlackRock, Inc.5,549,228NZ$793.1m
3.74%The Vanguard Group, Inc.5,546,646NZ$792.7m
Top Shareholders in XERO

From the above you can see that BlackRock and Vanguard Group own significant portions in the company. This is likely due to XERO being an ASX top 20 company, hence the majority of index tracking etf’s would be buying this share to hold in their ETF portfolio.

Should I Buy XERO Shares: Fundamentals

Xero has been growing revenues at a significant rate since starting in 2006 at over 18% YOY, however earlier years were much stronger at nearly 67% revenue growth. In the Period from FY2021, the share price increased 52%, whilst revenues only increased by 18.2% and Gross Profits grew 19.3%.

There currently seems to be some disconnect between the share price and the current growth story.

Xero Full Year Revenue from 2016 – 2021

From the FY2021 annual report, XERO provide an update on their key metrics, being number of subscribers and Revenue. Both revenue and subscriber growth in Australia, whilst still good have started slowing to the low double digits. Internationally this is a slightly different story, with UK and North America subscribers increasing at 17 and 18% respectively. However, the rest of the world growth has been significant at 40% YOY.

Whilst it is unlikely for XERO in our opinion to be able to see Australian growth numbers pick up substantially, we are greatly interested in how the roll out of the Rest of World and North America play out.

It’s worth noting that XERO plays against the formidable force US listed INTUIT a US$144billion dollar giant.

Xero has a debt to equity ratio of 114.8%, meaning that the company has more debt than equity. In our opinion this may be covered by future earnings, however is still significantly high.

ASX:XRO Business Results FY2021

Whilst Xero Stock reported a good set of number for the FY2021, we expect this will be substantially better in the FY2022 as the growth of the business seemed to struggle in countries where small to medium size business were under under an extended lockdown, such as the UK.

Xero Business Results Source

Xero has been increasing their free cash flows, which is something we like to see, this is directly linked to an increase in the companies EPS (earnings per share)

XERO Free Cash Flows (Source)

We can see that XERO is increasing their net profit and operating profit, however for a $22billion dollar company already, we are not sure that the growth here will necessarily translate to multitudes of market cap.

The company also have considerable debt on their balance sheet at NZ$856.682million vs equity of NZD$745.9 million, this translates into a debt to equity ratio of 114.8% which is considerably high.

Competitor Analysis XERO Vs Intuit

Competitor Analysis Intuit Vs Xero

When comparing XERO Stock to Intuit you can quickly see that based on PE ratio XERO seems priced with investors expecting very strong earnings growth in the future. However, investors buying on such a high multiple would be disappointed if XERO earnings announcements do not reflect these very high expectations.

Amazon stock in the dot com boom to only recover over 10 years later

There will become a time similar to the Dot Com boom in 2000, where multiple’s were bid up extremely high, only to take considerable amount of time for the growth to actually catch up to where the multiple was. Whilst it is likely to continue higher for some time, there will be a point in the sand where this may occur.

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Prophets Personal Xero Stock Price Forecast

Based on the current Operating Revenue by Geography the company does over 2/3 of its current revenue in Australia.

Operating Revenue By Geography ASX:XRO

From extrapolating the data above out to 2025, we come up with the below table. This implies the growth continues at current levels across geographies.

Prophet EBITDA/Share calculation

Prophet simply cannot justify paying in excess of $140 per share for an end result in 2025 of $3.18 of EBITDA or $114million in FCF. Xero also has considerable debt on their balance sheet and have a debt to equity ratio of greater than 1.14x meaning the company have more debt than equity currently. EPS is also typically lower than EBITDA/Share. The above also assumes no additional shares will be issued or bought back during the period.

Even based on our 2025 forecast of $1.7billion in revenue this would still be ~5x less than what INTUIT currently does, which on the same Price to Sales would mean XERO could be valued at up to say $28billion or 22% higher than the current price. Averaged out over the next 5 years this would equate to less than market beating returns YOY.

Whilst the company has been growing significantly since inception, the current price, seems extraordinarily high for us to get our heads around the valuation. Whilst there may be more in the tank here, we simply cannot be buyers at this level.

Prophets Take on Xero Shares

Simply put, we believe the current price is simply too high to justify future growth intentions, the stock trades on a PE of over 1000x and appears overvalued in our opinion based on current share price. Whilst there may be room in the tank, we simply cannot get our heads around the valuation.

Even based on our 2025 forecast of $1.7billion in revenue this would still be ~5x less than what INTUIT currently does, which on the same Price to Sales would mean XERO could be valued at up to say $28billion or 22% higher than the current price. Averaged out over the next 5 years this would equate to less than market beating returns YOY.

Based on our perceived risk vs reward on this stock, we simply cannot justify the risk and the reward is not big enough.

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Prophet will be staying clear of XERO shares for the time being.

Learn How We Analyze A Company:

The Ultimate Stock DD Checklist For Beginners

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