The Xero Limited (ASX: XRO) share price is down 37% over the past six months.
Revealed: 5 ASX tech shares I’d consider buying today
Usually, this would be a buying opportunity. But investors seem to be lukewarm to snatching up Xero shares recently.
Here’s why shares have fallen and where they could be heading next.
What is the Xero share price falling?
Xero reported a largely positive set of half-year results in November.
Annual recurring revenue is up 29%, subscribers increased 23% and the total lifetime value of subscribers rocketed by 61%.
But earnings growth reversed, with EBITDA down 19% as the business invested back into the business.
The more worrying trend is the inability to gain momentum in the large but difficult US market.
North American subscribers increased just 8% off a small base.
The business recorded revenue of just $30 million, compared to its biggest competitor Intuit, which achieved $1.6 billion in the last quarter alone.
Broader tech sell-off
The other contributor to the Xero share price fall is a broader sell-off in tech shares.
The S&P/ASX All Technology Index is down 25% since September, as businesses expecting profits in the future have been sold off in anticipation of interest rate rises.
While Xero is profitable, it’s reinvesting all of that cash flow to achieve bigger profits in future years.
When interest rates increase, those bigger profits are valued less today.
To illustrate, let’s say today you can earn 1% in a saving account of 10% in Xero shares.
But tomorrow, the bank suddenly says you can earn 5% in the savings account. You’d either expect a higher return from Xero or expect to pay a lower price for that 10% return.
An unrealistic scenario, but demonstrates how interest rates impact shares in the short term.
Hence, tech shares like the Xero share price have been sliced.
What’s next for the Xero share price?
Xero will report its FY22 results on May 12. Until then, there shouldn’t be material news relating to the business.
Although the Xero share price will continue to fluctuate. If interest rates increase, expect tech shares like Xero to come under more pressure.
Taking a longer-term outlook, I think Xero is one of the highest quality businesses on the ASX.
If it can execute abroad in the US and other international regions, I suspect it will be a much bigger business in five years’ time.
