The Xero Limited (ASX: XRO) share price languished today despite a broadly positive session for Australian shares.
Investors in the cloud-based accounting software provider might find some solace in the fact that they're not alone — misery loves company, right? Other notable ASX tech shares that experienced weakness today include Link Administration Holdings Ltd (ASX: LNK) and TechnologyOne Ltd (ASX: TNE).
Though, Xero is mostly to blame for dragging the technology sector into the red. At the closing bell, Xero shares shrunk 3.3% in value to $69.29 apiece. In contrast, the S&P/ASX 200 Index (ASX: XJO) finished 0.9% higher.
Losing one of its growth engines
Xero's bottom line is treading on the cusp of profitability. This puts a greater focus on the software company's top-line growth trajectory. If revenue begins to slow, it could significantly impact the future potential earnings power of the company, and its valuation.
Yesterday afternoon, the Australian Financial Review reported on the delay to the latest phase in the United Kingdom's Making Tax Digital (MTD) initiative. Under the revised plan, the use of digital accounting for income tax self-assessment (ITSA) has been pushed back from April 2024 to April 2026.
Those earning more than £50,000 (A$87,975) will now have an additional two years to adopt an MTD-supported software solution. The change is a blow to Xero's share price and its short-term growth ambitions in its largest market outside of Australia.
The accounting software company provided the news itself via a blog three weeks ago. Within the blog, Xero shared the new-look roadmap for its major UK catalyst, the MTD rollout:
- April 2026 — MTD for ITSA instituted for businesses, self-employed individuals, and landlords with income over £50,000
- April 2027 — MTD for ITSA instituted for businesses, self-employed individuals, and landlords with income over £30,000
Importantly, the changes are merely a delay and not a removal of previous plans. However, the high rate of inflation puts a greater value on cash flows in the near term.
Does the Xero share price have potential?
Shareholders might be wary of slowing growth in the future. Though, Xero has been growing its cash from operations at an impressive margin for years. The question is whether there will be considerable profits to be made when the company decides to take its foot off the gas.
Two brokers that are opportunistic on the Xero share price at the moment are Citi and Bell Potter. Both currently hold a price target of $97.90 on Xero shares. That would mean investors at today's price could be looking at roughly a 42% upside.
The Xero share price is down an astonishing 45.8% over the past year.
