Xero Ltd (ASX: XRO) shares plunged nearly 15% last week and have remained relatively flat so far this week. At the time of writing, ahead of the ASX open on Tuesday, the shares are at an 18-month low of $122.22 a piece. The shares are now 28.34% lower than this time last year.
What happened?
It's been a rollercoaster year for the cloud-based accounting software company's stock. Over the past 6 months, Xero shares have dropped 32.65% after the company announced a lower-than-expected FY25 result in May, followed by news of its US$2.5 billion acquisition of US-based Melio in July.
The move spooked investors who sold off shares in a panic about the deal's size and projected cash flow. The deal was completed in mid-October, but investor confidence still doesn't appear to have recovered.
On Thursday last week, Xero released its FY26 interim results. For the six months ended 30 September, Xero reported an impressive 20% increase in operating revenue to NZ$1,194 million. This was driven by ANZ revenue growth of 17% and a 24% jump in International revenue. Xero's EBITDA increased 21% to NZ$377.9 million. The company's net operating result was a little behind expectations, but its EBITDA was ahead.
But investors are reacting cautiously. This could be because the company also reported that total operating expenses as a percentage of revenue are now expected to be around 70.5% in FY26. Although, it's an improvement on the 71.5% that Xero previously expected.
What do analysts think of Xero shares?
Analysts think this year's investor sell-off is unfounded.
Just yesterday, analysts at Macquarie said they think the market has it wrong on Xero shares. In a note to investors, the broker said there is nothing in Xero's latest results that explains the sell-off. It added that its newly acquired Melio business is performing on track, and with the deal closing earlier than expected, the company could start cross-selling products as soon as December.
Macquarie has an outperform rating and $230.30 12-month target price on Xero shares. At the time of writing, this implies a potential 88.4% upside for investors.
The broker isn't the only one, either. TradingView data shows that out of 15 analysts, 12 have a buy or strong buy rating on Xero shares. The maximum target price is $230.60, while the average is $184.66. These represent a potential upside of anywhere from 51.09% to 88.68% over the next 12 months.
