Xero Ltd (ASX: XRO) shares surged 6% to $75.17 on Thursday following the release of the company's half-year results.
And one announcement certainly caught my attention. Management revealed plans to buy back up to A$1 billion worth of shares over the next 12 months.
But is this enough to make me want to buy Xero shares? Let's take a look.
Why is Xero buying back shares?
I think the buyback is a big development, especially given the company's recent share price weakness.
Xero's board believes its shares are trading below their long-term value and sees an opportunity to put some of its cash to work.
Buying back shares can benefit remaining shareholders by reducing the number of shares outstanding, potentially increasing their ownership of the business and its future earnings.
Although part of the program will offset employee share-based compensation, I think it's an encouraging sign of management's confidence.
And importantly, Xero believes it can fund the share buyback while continuing to invest in its growth opportunities.
That suggests to me that the company is becoming increasingly comfortable with its financial position.
What did the results reveal?
I think there was plenty to like in Thursday's results beyond the buyback.
For the six months ended 30 September, Xero reported a 46% increase in revenue to NZ$1.75 billion. That figure includes the contribution from its acquisition of US payments business Melio, but underlying growth was also strong.
On a comparable basis that includes Melio in both periods, revenue increased 27%.
Xero also added 226,000 customers, taking its total to more than 5.1 million. I believe this demonstrates that demand for its accounting and business management software remains strong.
And I'm feeling increasingly optimistic about the opportunities Melio could create in the United States.
Combining accounting software with payments makes it easier for small businesses to manage their finances through one platform.
I think that's a valuable proposition and could help Xero attract more customers while increasing revenue from existing ones.
However, the acquisition is still putting pressure on profitability. Xero's statutory net profit fell 86%, with Melio's losses contributing to the decline.
The positive news is that management expects Melio to reach adjusted EBITDA breakeven on a run-rate basis in the second half of FY28, so it could soon start contributing to its earnings growth.
Would I buy Xero shares?
I would buy Xero shares today. One reason is that Xero's latest results suggest its growth opportunities are translating into stronger financial expectations.
Management upgraded its FY27 revenue guidance to between NZ$3.77 billion and NZ$3.83 billion, although favourable currency movements contributed to the increase.
It also raised the lower end of its adjusted EBITDA guidance to NZ$880 million. And looking further ahead, Xero now sees an opportunity to generate more than NZ$4.6 billion in revenue in FY28, excluding potential revenue synergies.
I believe its growing customer base, payments expansion, and opportunities to introduce additional services could support earnings growth for many years.
There are still risks to consider, including Melio's integration, competition, artificial intelligence (AI) disruption, and Xero's demanding valuation.
However, I'm comfortable paying a premium for a business with strong annual recurring revenue (ARR) and opportunities to expand internationally.
Foolish takeaway
I like the confidence Xero has shown with its A$1 billion share buyback.
But it's the underlying growth of the business that makes me want to own its shares.
With its US operations gaining momentum and profitability expected to improve, I'd be happy to buy Xero shares at $75.17 and hold them for the long term.
The post Xero just announced a $1 billion share buyback. Would I buy now? appeared first on The Motley Fool Australia.
Motley Fool contributor Grace Alvino has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Xero. The Motley Fool Australia has positions in and has recommended Xero. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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