Xero Shares Are 56% Off the Peak, Is the Market Mispricing Quality?

The SaaS Reset Creates a New Entry Debate for Xero Shares

Across the Australian tech complex, we have seen a clear de rating cycle in many premium SaaS and infrastructure names including WiseTech, Xero, TechnologyOne and Megaport. In our view, this has largely been a healthy correction rather than a collapse in business quality.

Many of these stocks were pulled higher by momentum and narrative, and as rates stayed elevated and growth expectations normalised, valuations have moved back toward more sustainable levels.

Xero is a good example. The stock is down around 56% from its peak and has retraced to roughly A$83. While the price action looks similar to the drawdowns seen in other high multiple software names, we do not interpret this as a fundamental break in the business.

Instead, it appears more consistent with multiple compression and a market driven reset in what investors are willing to pay for growth.

Sell side positioning also remains constructive. There are 13 analysts covering Xero, with an average target price of approximately A$181, implying meaningful upside from current levels. That said, optimism does not eliminate risk.

Further downside can still occur if revenue growth softens, margins fail to expand as expected, competitive intensity increases, or if the broader macro backdrop continues to weigh on multiples.

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Cheap Enough Yet?

Xero has also recently outlined its next phase of strategy, centred on two priority growth vectors: AI-led product evolution and the US market opportunity. The company’s ambition is to expand from being a system of record, essentially a bookkeeping ledger, into a system of action and decision making that helps small businesses run workflows end to end.

A key enabler is the rollout of agentic AI, designed to automate tasks, surface insights, and improve workflow outcomes across accounting, invoicing, payroll, and broader small business operations.

Early adoption metrics suggest this strategy is gaining traction. Xero reports more than 2 million users engaging with AI enabled features, representing roughly half of its subscriber base, with around 300,000 users actively using generative AI capabilities.

Support efficiency is also improving, with more than 97% of help sessions reportedly resolved without a support ticket, partly driven by AI.

In parallel, engagement is lifting, with approximately a 61% increase in JAX messages per user over the past three months, a direct usage KPI that can indicate deeper product dependency, higher retention, and potential upsell over time.

Financial momentum remains solid. In H1 FY26, revenue reached approximately $1.1 billion, up 20% year on year, driven by both subscriber growth and ARPU expansion. Subscribers increased 10%, with the UK and US highlighted as key drivers of customer adoption.

International revenue grew 24% year on year, outpacing Australia’s 19% growth, reinforcing that the growth mix is increasingly skewing offshore. Free cash flow was a standout, rising to $321 million, delivering a free cash flow margin of 26.9%, which supports the view that Xero is scaling with improving cash conversion.

Analysts See Big Upside, Here’s the Catch

The key takeaway for Xero investors is simple: do not get shaken out by weak hands. The broader SaaS sector was due for a meaningful correction, and in our view this looks far more like a valuation reset than a fundamental break in business quality.

If anything, the pullback is creating a more attractive entry point. The upside is becoming clearer as expectations normalise, and the market starts to re price the business on execution and cash flow rather than hype.

That said, there are real risks investors need to underwrite.

First, the US opportunity is not a free win. The US small business accounting market is crowded and highly competitive. Taking share requires sustained product differentiation, distribution leverage, and disciplined marketing spend. If Xero has to spend materially more to acquire customers, it can pressure margins and delay the payoff from expansion.

Second, ARPU expansion is a powerful lever, but it needs to be handled carefully. Price increases can lift revenue, but if pushed too hard they can also increase churn, reduce conversion for new customers, or push users toward lower tiers. In SaaS, pricing is only as good as retention.