Fiscal 2026 adjusted EBITDA increased 18% to NZD 757 million, driven by a 31% increase in revenue and margin compression from the Melio acquisition. Organically, adjusted EBITDA grew 30%. Shares fell sharply as competitor QuickBooks launched an integration with AI giant Anthropic.

Why it matters: Several narratives are driving negative market sentiment for the company, including the company’s expansion into the US, which the company doubled down on with the Melio acquisition, and the threat of disruption from artificial intelligence.

  • We agree with concerns about expansion in the US. We have been skeptical of Xero’s right to win here against behemoth Intuit, which has superior distribution from collaboration with accountants and bookkeepers. In our view, Xero can only compete on price while having to match on features.
  • However, we don’t believe AI is a threat to either distribution or as a direct competitor. We believe software providers will match each other in integrations with AI providers, and we expect software to remain the primary way to do accounting and bookkeeping due to its better user interface.

The bottom line: We maintain our fair value estimate for narrow-moat Xero of $100 per share. Shares are down over 60% since the company announced the acquisition of Melio in mid-2025 and now screen as materially undervalued.

  • Although we view expansion into the US as a relatively unattractive investment opportunity, we believe the market is underestimating the value of the ANZ business, as group profits are weighed down by expansion into the highly competitive US.
  • We estimate the ANZ segment could generate nearly NZD 700 million in net profit after tax, or NPAT, earnings in fiscal 2027. Combined with 25 times multiple, which we consider appropriate for a defensible but maturing business, this segment alone is worth more than the current market capitalization, in our view.

Xero’s ANZ business is overlooked by international expansion

We expect Xero’s near- and medium-term strategic focus to revolve around rationalizing its areas of investment, especially against a backdrop of normalizing demand for business software.

After the onset of the covid-19 pandemic, new business creation levels spiked while business failure rates plummeted, which we believe provided a temporary tailwind for business software.

In response to this tailwind, Xero nearly tripled its total expenditure on product design and development. However, we see little evidence of returns on these investments. Xero today operates mostly in the same markets as it did a decade ago. Therefore, we believe investments in country-specific adaptations of its products do little to explain the 10-fold increase in total expenditure on product design and development over the period. We also don’t see compelling evidence of returns on investment into new features and functionalities. New Zealand, Xero’s most mature market, should reflect increased average revenue per user if new features and functionalities are valued by customers. Instead, the New Zealand market has only seen low-single-digit growth in ARPU over the past decade, leading us to believe Xero’s small and midsize enterprise, or SME, customers value simplicity, not features and functionalities.

Xero’s investments in sales and marketing in its international markets have also seen diminishing returns since the onset of the pandemic. Xero’s international customer acquisition costs, per subscriber, have grown by over 50% since the onset of the pandemic and are three times greater than its Australia and New Zealand markets. Although the lifetime value, or LTV, per international subscriber is still three times CAC, and CAC payback remains under two years, Xero’s overseas expansions have seen differing degrees of success over the past decade. Whereas Xero has successfully made inroads into the United Kingdom—where we estimate it is capturing around a third of new businesses created—in the United States, Xero’s market share continues to hover at just 1%. We don’t expect the Melio acquisition to unlock this opportunity.

Bulls say

  • Xero holds a dominant market position in Australia and New Zealand, where its business is supported by network effects.
  • Xero has successfully made inroads into the UK, where it is capturing around a third of new businesses being created.
  • Under new leadership, Xero has renewed focus on fiscal discipline.

Bears say

  • Xero’s customer base of SMEs is low-quality, due to the segment’s inherently high business failure rates. This will require constant spending on sales and marketing to replenish churned customers.
  • Xero has been unsuccessful at making inroads into North America, where it holds just 1% market share.
  • Xero has a chequered history regarding fiscal discipline, especially in product design and development.