On Thursday, RBC Capital Markets adjusted its financial outlook for Xero Limited (XRO:AU) (OTC: XROLF) shares, a cloud-based accounting software firm. The price target has been increased to AUD160.00, up from AUD155.00, while the Outperform rating remains unchanged. The revision reflects a positive assessment of the company's pricing strategy and financial instruments.
The analysis by RBC Capital indicates that there have been no price changes for existing customers of Xero or QuickBooks in any geography during the month. The research also highlights that new challengers in the market are pricing their offerings lower outside their home markets to gain new subscribers. Additionally, the United Kingdom is identified as the most competitive market where Xero and QuickBooks are similarly priced.
RBC Capital has also adjusted its forecasts for Xero's net profit after tax (NPAT) for the fiscal years 2024 and 2025, increasing them by 1% and 5% respectively. These revisions take into account the impact of a new convertible note and adjustments to deferred tax assets.
The firm emphasizes that Xero's shares are currently trading at attractive multiples, significantly lower than their historical five-year average. Xero's enterprise value to sales ratio stands at approximately 10 times, compared to a historical average of 13 times, and its enterprise value to EBITDA ratio is around 30 times, in contrast to an approximate 55 times historically.
RBC Capital's analysis concludes that Xero's financial positioning and market strategy support the Outperform rating, with the revised price target reflecting the company's potential for continued growth and performance in the competitive cloud-based accounting software market.
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