Could Xero Shares Soar Higher? 3 Brokers Share Insights

Xero Ltd Shares Experience Volatile Week

Xero Ltd shares experienced a rollercoaster week, with an initial sell-off following the release of the company's full-year results, only to rebound the next day and recover all of the losses. This volatility highlights the market's reaction to the company's performance and strategic moves.

Kneejerk Sell-Off

Investors appeared to overreact to the headline profit figure, which fell by 27% to NZ$167.4 million. This decline was attributed to costs associated with Xero's acquisition of Melio. However, there were several positive aspects in the company's financial report that should not be overlooked.

Strong Performance Indicators

Despite the drop in profit, Xero reported impressive growth in other areas. The company saw a 31% increase in revenue, reaching NZ$2.8 billion, and an 18% rise in EBITDA to NZ$757.4 million. These figures indicate robust performance across the business.

CEO's Perspective

Chief Executive Officer Sukhinder Singh Cassidy highlighted the strong result, stating that the company's 3×3 strategy is gaining momentum. She noted significant US growth, with 110,000 new customers, including new Melio direct payments customers, and pro-forma revenue growth of 50%. The CEO emphasized the company's powerful momentum across its markets and its commitment to delivering strong EBITDA growth while integrating Melio.

Share Buyback Announcement

In addition to the strong financial results, Xero announced a NZ$550 million share buyback. This move signals confidence in the company's future and provides value to shareholders.

Analysts' Views

Several analysts have weighed in on Xero's performance and outlook. Morgans noted that both the results and the company's outlook for FY27 exceeded expectations. They pointed out that earnings momentum continues to improve relative to consensus expectations. Management's confidence was evident in the announcement of the buy-back and hints at potential capital management in FY28. However, investors remained cautious about the risks associated with AI disruption.

Morgans raised the question of whether Xero can replicate its success in Australia and New Zealand in offshore markets. They set a price target of $111 for Xero shares.

Diverse Broker Perspectives

Morgan Stanley is more optimistic, setting a higher price target of $130 for Xero shares. They suggested that the debate on long-term earnings and terminal values is still active for tech companies with AI exposure. Morgan Stanley believed that a share derating had been warranted but was too severe, with the market underappreciating Xero's competitive position locally.

Macquarie, another broker, has an even higher price target of $235.80 for Xero shares. Their analysis indicated that management is making data-driven decisions leading to better capital allocation outcomes. They see the stock as fundamentally mispriced and expect AI monetisation and US growth to be key catalysts for re-rating the stock.

Conclusion

The post "Could Xero shares really go that high? 3 brokers weigh in" originally appeared on The Motley Fool Australia. As investors consider where to allocate their funds, it's essential to evaluate the company's performance and future prospects carefully. With strong financial results and strategic initiatives, Xero remains a compelling investment opportunity.

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