The Xero Limited (ASX: XRO) share price rose 3.8% on Tuesday despite no news hitting the market. Is it still a good investment?
About Xero
Founded in New Zealand in 2006, Xero has become the dominating player in the business and accounting software market in Australia, New Zealand and the UK. Employing more than 2,300 people, Xero helps more than 1.5 million subscribers managed their accounting and tax obligations.
Xero Share Price Hits All-Time High
The Xero share price rose 3.86% yesterday, continuing the run that has seen it rise by about 45% since November 2018. Xero shares now sit at an all-time high price of around $53.30.
But with no news announced, what pushed the share price higher?
Software-as-a-Service (SaaS)
This is a term you have probably seen a lot lately: software-as-a-service (SaaS).
SaaS is the buzzword in share markets right now, and there are plenty of cloud-based companies pushing new highs thanks to the positive market sentiment.
Companies like WiseTech Global Limited (ASX: WTC) and Intuit Inc (NASQDAQ: INTU) come to mind as some examples. I recently sold my WiseTech shares because I think they are overvalued.
Xero is an attractive business, with a strong “moat” or competitive advantage, no debt and sales that are rising steadily. At the same time, earnings per share is still negative and Xero makes a negative return on equity as well.
The hype around Saas is arguably pushing the share price higher than it deserves to be.
My Take
While some of these SaaS companies look like solid businesses, a lot of them don’t have very strong fundamentals. The share prices are largely based on speculation and future earnings potential and don’t often consider how the business is performing now.
I think that picking the right business to invest in could lead to huge profits if held for the long term but picking the wrong business could make for a very disappointing investment.
Personally, I don’t think I have the skillset to pick the best one, so I’d rather invest in one of the three ASX businesses in the free report below.
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Disclaimer: At the time of writing, Max does not own shares in any of the companies mentioned.
