Shares of Xero Limited (ASX: XRO) have taken a very cold shower, with XRO stock down about 6% just today – closing for $59.97 this evening.
Xero has been one of the outperforming WAAAX stocks in 2019 so far. Xero started the year trading for $41.05 but as of last week, XRO shares were knocking on the $66 per share level – a YTD gain of 60%. Even with today's price drop, Xero is still looking at a yearly gain of 46%. So why is Xero lighting up the market? And (more importantly), is Xero a buy at this new discount?
Why have Xero shares hit the roof this year?
If you weren't aware, Xero offers cloud-based accounting software to businesses and individuals on a subscription basis. Rather than buying the software outright (soo0o early 2000's), customers pay to 'rent' the software on a monthly basis over the internet.
The company has a 'status' advantage as a WAAAXer – us Aussies love a home-grown tech company that takes on the world, especially a Software-as-a-Service (SaaS) one. This places Xero at a pricing advantage – investors usually like to lend some leniency to this type of company regardless of its bottom line. Just look at the recent shoot-the-lights-out IPO of Sezzle Inc. (ASX: SZL).
Xero also has the advantage of knockout subscriber growth (31% from the most recent numbers) and revenue growth (32%).
All of these factors have combined to drive investors crazy over Xero stock, despite its so-far lack of profitability and its revenue of $63.8 million of revenue resting on a market capitalisation of $8.47 billion.
Foolish Takeaway – Is Xero a buy?
This lofty valuation is assuming Xero's impressive growth numbers will continue for many years – which is fine, Xero is showing all the signs of being a future ASX heavyweight. But it also leaves today's stock highly vulnerable to stock market corrections and/or crashes. Even today, the ASX 200 index was down 2.4%, but Xero took a 6% trimming. I would be concerned about what would happen to XRO shares if the ASX200 dropped 10% – I don't think it would be pretty.
Bottom line (for me anyway) Xero's share price remains a little risky, even after today's falls.
