Xero Limited (ASX: XRO) shares have opened the week strong today, banking a 2.5% rise to $77.19 at the time of writing. Even so, the Xero share price is still down 7.6% over the past week.
Xero is one of those shares that doesn't seem to ever dip too much, so is this a rare buying opportunity?
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Why has the Xero share price dipped?
Xero shares fell last week after the company released its FY20 results to the market. Xero reported some strong numbers, including a 26% increase in subscribers, a 30% increase in revenues and an inaugural profit of NZ$3.3 million. Free cash flow also increased by 320% to NZ$27.1 million.
But despite these numbers, investors were clearly expecting a little more out of this WAAAX market darling. Xero shares dipped in response, falling from nearly $84 on Wednesday to around $75 by the end of the week.
Does this mean Xero is a buy today?
Although the Xero share price has come off the boil, I'm still not convinced it's at a compelling level today.
Xero is a company investors are pricing for a high growth future and it does have a long growth runway, for sure. Governments around the world are pushing for their taxpayers to switch to digital providers like Xero, which is a great long-term tailwind for the company to enjoy. Further, Xero has shown its product is extremely sticky, with most customers remaining on its platform after onboarding.
But with a current price-to-earnings ratio over 3,500, I think investors are seeing a little too much future potential based on current levels. Remember, this is a company that has just turned its first profit of NZ$3.3 million, yet has a market capitalisation of nearly $11 billion.
Furthermore, I still have concerns that Xero might run into increased competition which, in turn, may slow the astronomical rate of its subscriber growth. Intuit Inc. (NASDAQ: INTU) is one of Xero's major competitors and has also been growing its market share in North America.
Perhaps on current prices, the market is treating Xero like a future monopoly in its cloud accounting space, rather than one of several strong players.
Foolish Takeaway
Xero is a high-quality company to be sure, and one I wouldn't mind owning shares in at some point. But I think the current market environment is not one we should be making high-growth bets in. Therefore, today's Xero share price is still a little out of my comfort zone. Call me if the Xero share price falls back to under $60 where it was a year ago and we might have a different conversation!
