XRO has been at the forefront of the “AI Disruption Trade” or “SaaSpocalypse”, whichever you prefer, with the stock falling almost 70% from its 2025 high. The company didn’t help things buying Melio for US$2.5bn in late 2025, by far its largest acquisition, effectively right at the top of tech valuations. In hindsight, we liked the acquisition of the US SMB bill-pay/payments platform, to combine accounting and payments and materially accelerate Xero’s US growth, just not the price XRO paid.
As the chart below illustrates, Xero has delivered remarkably consistent revenue growth over the past decade, while its share price has followed a far more volatile path, heavily influenced by changing bond yields and, more recently, the AI-driven “Disruption Trade.” However, revenue is only part of the story; margins are critical; rising revenue on contracting margins is bad news. Xero’s margin story over the past decade has been one of heavy upfront investment followed by a sharp improvement in profitability. FY26 saw some moderation, although an 83.9% gross margin is not to be sniffed at!
- Gross margins remain under pressure: Consensus expects Xero’s gross margin to fall from 83.9% in FY26 to 78.6% in FY27 and 77.6% in FY28, suggesting the recent decline is more than a temporary setback.
- Profitability is expected to stabilise rather than rebound sharply: EBITDA margins are forecast to hold around 24–26%, while net margins recover from 5.2% in FY27 to 7.7% in FY28.
The real question, as we so often write with growth stocks, is what valuation should investors be prepared to pay for the path ahead: XRO is trading at its lowest economically meaningful forward P/E in its listed history (~63x), but it’s still not cheap for a ~$14bn company who only delivered a NPAT of NZD$167.4mn in FY26 (end of March year).
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Xero (XRO) Annual Revenue (NZD) v Share Price (A$) – Source: Bloomberg
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Xero (XRO) Annual Revenue (NZD) v Share Price (A$) – Source: Bloomberg
Moving forward we see 5 key “perceived” risks for Xero (XRO): AI disruption & competition, slowing core-market growth, Melio execution risk, margin pressure and Macro & technology execution risks.
However, we believe the market is underestimating the potential benefits of AI for Xero. Rather than simply posing a threat to traditional accounting software, AI represents both a defensive opportunity and a powerful growth driver, potentially making Xero’s platform more valuable, more efficient and ultimately stickier for customers.
- Automating accounting: Xero’s JAX (Just Ask Xero) AI agent is designed to automate repetitive tasks such as bank reconciliation, invoicing, document processing and financial analysis, potentially making Xero significantly more useful to SMEs.
- Increasing revenue per customer: Xero plans to begin monetising AI in FY27, initially through existing subscription packages. Surveys suggest SMEs are willing to pay around 8.5% more for AI functionality, providing a potential ARPU growth lever.
- Improving productivity: AI is already delivering internal efficiencies, with 83% of Xero employees using AI daily and developer tools reportedly saving engineers around 3.5 hours per week, helping accelerate product development.
- Strengthening Xero’s moat: Decades of SME financial data, established bank feeds, payment infrastructure and its large app ecosystem are difficult for new AI-native competitors to replicate. Accounting also requires accuracy, security, compliance and auditability, increasing switching costs.
- Opening new distribution channels: Partnerships with OpenAI and Anthropic allow customers to interact with Xero data through external AI platforms, potentially extending Xero’s reach beyond its traditional interface.
For MM, AI could ultimately prove more opportunity than threat for Xero. If the company can use AI to automate more of the accounting process while increasing ARPU and lowering its own development costs, the technology could strengthen rather than disrupt its competitive position. The key will be execution, particularly whether FY27 starts to show tangible revenue and margin benefits from AI but as we will see later, some companies are already showing the way.
We can see XRO retracing back under $80 under the weight of rising bond yields, but we like the risk/reward into such a move: MM holds XRO in its Growth Portfolio.
MM is bullish towards XRO below $80
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