It has certainly been a rough start to the year for Xero Limited (ASX: XRO) shares. After rocketing 84% higher in 2020, the Xero share price has been steadily drifting back to earth so far in 2021.
In fact, Xero shares have slumped by more than 19% in just two months. This is almost two-thirds as much as the company fell by during the COVID-19 induced panic which bottomed out on 23 March last year.
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What's dragging down the Xero share price?
The timing of the slump in the Xero share price does seem odd. Vaccines are being rolled out at a rapid rate and new cases of COVID-19 in the United Kingdom and United States have been plunging. In fact, we have never been closer to an end to the pandemic. Surely this would be good news for Xero's small business customers?
With no material company announcements in 2021, one possible factor dragging down the Xero share price is the prospect of rising interest rates. As economic activity starts to pick up again, we are likely to see some of the emergency measures used to keep the economic heart beating being eased. This means we could be waving good-bye to record low interest rates.
Rising interest rates can be bad news for a company's share price because future earnings get discounted at a higher rate, reducing its fundamental value.
Another possibility for the drift lower is simply that the Xero share price got caught up with the post-COVID tech rally and the market got ahead of itself. This was amplified when Xero was added to the MSCI Global Standard Index late last year, boosting interest in the company.
Should you be worried?
Neither factor, interest rate worries or shifting investor sentiment, is really related to how Xero's business is performing. Is Xero likely to see lower subscriber growth because of COVID-19? Absolutely, but that is not new information.
In the six months to September 2020, Xero announced it had slashed spending on advertising and marketing in response to the pandemic which would slow growth. Even then, Xero added 168,000 new subscribers during the period and grew free cash flow from NZ$4.8 million to NZ$54.3 million.
It's worth remembering too that in the five years to 31 March 2020 Xero was able to grow revenue at a compound annual growth rate of 36%! Xero's full-year FY21 results are due to be released on 13 May 2021 and investors will be paying keen attention to how the company plans to revive growth again for the years ahead.
