Xero Falls 5% Despite Beating Expectations: Why Strong Results Don’t Always Mean Higher Prices

Xero (ASX: XRO) delivered results on November 13 that beat analyst expectations across the board, yet shares fell 5% in response. Revenue climbed 20% to NZ$1,194 million, EBITDA came in at NZ$377.9 million, well ahead of Macquarie’s NZ$344 million forecast, and free cash flow margins continued expanding. For most companies, this would trigger a rally. Instead, investors are fixated on what the numbers don’t show: whether Xero’s expensive US expansion bet will deliver returns that justify the $2.5 billion price tag.
The selloff reflects a familiar pattern in growth stocks, when execution is strong but the path forward involves risk, markets price in doubt before opportunity. We believe this reaction creates a potential entry point for investors willing to accept near-term uncertainty for long-term US market exposure.

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Xero Delivers Strong Growth Across ANZ and International Markets

The underlying business momentum remains impressive and, critically, profitable. Xero’s subscriber base grew to 4.59 million, with average revenue per user (ARPU) rising 15% to NZ$49.63. This combination demonstrates pricing power and customer retention, the hallmarks of a healthy SaaS business with genuine competitive moats.

Financially, the company is hitting key profitability markers that matter:

– Free cash flow margin expanded to 26.9%, suggesting the company is converting revenue into cash more efficiently and strengthening its ability to self-fund growth without dilutive capital raises

– The Rule of 40 score reached 44.5%, comfortably exceeding the 40% threshold that signals balanced growth and profitability. This places Xero among the top-tier SaaS companies globally

– EBITDA beat of roughly 10% versus forecasts indicates operational discipline is improving even as the company invests heavily in international expansion

What makes these results particularly strong is that they occurred while Xero continued investing heavily in product development and the Melio integration. The company isn’t sacrificing growth for profitability; it’s achieving both, which is what separates quality platforms from commoditised software.

Why Xero’s Big US Bet Is Making Investors Nervous

Xero has announced a $2.5 billion acquisition of Melio, a US-based payments platform. While management sees it as a fast-track into the US market, investors are worried about three key risks:

– High Price Tag: Melio generates around NZ$183 million in revenue, meaning Xero paid over 13 times revenue- a steep price, especially in a market where tech valuations have fallen since 2021.

– Short-Term Pain: The deal will likely hurt earnings in the near term due to integration costs. That’s a concern for a stock already trading at high multiples.

– US Market Challenge: Xero has struggled to grow in the US, where QuickBooks dominates. Investors are unsure if Melio can change that and how long it might take.

Xero’s $2.5B deal is a big bet on US growth. The price is high, earnings will take a hit, and US market traction remains uncertain. Unless Melio delivers clear growth by FY26, investors may see more risk than reward in the short term.

The Investor’s Takeaway

At around $132, Xero now trades well below its $196.52 peak, giving long-term investors a more reasonable entry point. In our view, the current valuation, roughly 30–32x forward revenue, is only justified if US momentum improves, but Macquarie’s $228.90 price target highlights how much upside the market may be overlooking.
The key catalyst remains US subscriber growth. If Melio drives meaningful adoption over the next few quarters and lifts retention and ARPU, sentiment will shift quickly. We believe adding more than 100,000 US subscribers by mid-2026 would validate the strategy and ease concerns around slowing growth.
For growth-oriented investors with a 2-3 year horizon, comfortable with execution risk, current levels could represent an attractive entry point. The risk-reward skews favourably if you believe in management’s ability to crack the US market. For conservative investors, waiting for tangible evidence of US momentum before committing capital remains the prudent approach.