Xero Limited (ASX: XRO), like the rest of the ASX technology sector, woke up to a sea of red yesterday after Pfizer announced its COVID-19 vaccine candidate has shown to be 90% effective in stopping the virus in a phase 3 study.
The Xero share price finished the day 3.5% lower, while the S&P/ASX 200 (ASX: XJO) gained 0.7%.
What is Xero?
Xero is a cloud-based accounting software service for small businesses and has enjoyed a rally since the 23 March COVID-19 market low, adding just over $50 to its share price or about 51%.
XRO share price chart
Does the COVID-19 vaccine provide a headwind for Xero going forward?
The market’s reaction to the vaccine announcement has been swift, but it might provide an opportunity to buy in on a fast-growing ASX tech share like Xero if investors move fast.
Lofty valuation
With a price-to-earnings (P/E) ratio of 5159.31, Xero is trading at a very high multiple compared to the Australian software industry P/E ratio of 30.42x, according to Simply Wall St.
Xero might justify this high valuation with strong results presented at its annual general meeting (AGM) in August. The company added 96,000 subscribers in the first four months of FY21, bringing total subscribers to 2.38 million.
The August update grows upon Xero’s impressive FY20 results where it became net profitable. The company reported a NZ$30.5 million year-on-year increase in net profit after tax and grew its free cash flow to NZ$27.1 million in the year ended 31 March 2020.
Following its AGM update, Xero completed the acquisition of lending platform Waddle for $80 million in October for a combination of cash and stock. The acquisition helps bolster Xero’s growth trajectory and improves the product offering for its small business customers.
FY21 half-year result on the horizon
Xero is set to release its interim FY21 half-year results tomorrow on Thursday, 12 November. So, on the back of the COVID-19 vaccine news, does the pull-back in the Xero share price present a buying opportunity before strong FY21 half-year results?
Xero appears to have some strong tailwinds taking it into the earnings announcement, but I would caution around buying shares before an earnings report that comes with no guidance. The company has not provided guidance due to the continuing uncertainty surrounding the COVID-19 environment.
A COVID-19 vaccine and a return to normality should provide a strong tailwind for Xero. With small businesses becoming more active, the need for cloud accounting software should grow. I think the pull-back from this Pfizer announcement is short-term.
Are Xero shares a buy?
I will be tuning into Xero’s earnings call on Thursday and awaiting what its FY21 half-year results reveal. Investors will be looking out for continuing net profit growth.
The company has advised investors that the acquisition of Waddle will have minimal impact on its FY21 EBITDA and combined with the comments made at the AGM, Xero might be posting some very impressive results.
However, like always, the looming cloud of COVID-19 masks the earnings announcement with uncertainty.
To learn more about Xero and its underlying fundamentals, check out this article from lead analyst Owen Raszkiewicz: 5 reasons to fall in love with the Xero share price
