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Is It Too Late To Consider Buying Xero Limited (ASX:XRO)?

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·3 min read
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Xero Limited (ASX:XRO), might not be a large cap stock, but it saw significant share price movement during recent months on the ASX, rising to highs of AU$108 and falling to the lows of AU$76.90. Some share price movements can give investors a better opportunity to enter into the stock, and potentially buy at a lower price. A question to answer is whether Xero's current trading price of AU$82.93 reflective of the actual value of the mid-cap? Or is it currently undervalued, providing us with the opportunity to buy? Let’s take a look at Xero’s outlook and value based on the most recent financial data to see if there are any catalysts for a price change.

View our latest analysis for Xero

What's the opportunity in Xero?

According to my valuation model, the stock is currently overvalued by about 28%, trading at AU$82.93 compared to my intrinsic value of A$64.73. Not the best news for investors looking to buy! 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.

What kind of growth will Xero generate?

earnings-and-revenue-growth
earnings-and-revenue-growth

Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. Although value investors would argue that it’s the intrinsic value relative to the price that matter the most, a more compelling investment thesis would be high growth potential at a cheap price. With revenues expected to grow by 84% over the next couple of years, the future seems bright for Xero. If the level of expenses is able to be maintained, it looks like higher cash flow is on the cards for the stock, which should feed into a higher share valuation.

What this means for you:

Are you a shareholder? It seems like the market has well and truly priced in XRO’s positive outlook, with shares trading above its fair value. At this current price, shareholders may be asking a different question – should I 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 positive outlook is encouraging for XRO, which means it’s worth diving deeper into other factors in order to take advantage of the next price drop.

If you'd like to know more about Xero as a business, it's important to be aware of any risks it's facing. In terms of investment risks, we've identified 1 warning sign with Xero, and understanding this should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.