Xero crashes 14% to a multi-year low. What on earth is going on?

Xero shares sink 14% to a multi-year low as AI fears hammer tech stocks.

| More on:
Red arrow going down, symbolising a falling share price.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Xero Ltd (ASX: XRO) shares have been absolutely smashed.

The cloud accounting software company's share price has plunged 13.95% to $82.69, marking a fresh multi-year low. In early trade today, the stock briefly fell as low as $81.81.

To put this move into context, Xero has not traded at these levels since early March 2023.

For a company once valued close to $200 per share, this sell-off has been absolutely brutal.

Let's dive right in and see what's driving the fall.

Tech stocks are being hit hard

The biggest factor behind Xero's plunge is not company-specific news.

Instead, the sell-off is being driven by a major slump across the technology sector. The S&P/ASX All Technology Index (ASX: XIJ) is down a mammoth 7.77%, reflecting heavy selling across ASX tech stocks.

Investors are growing increasingly nervous about artificial intelligence disruption. There is a fear that rapid advances in AI could undermine traditional software businesses by automating tasks faster and cheaper than existing platforms.

That concern has triggered sharp declines in technology stocks globally, particularly companies that rely on subscription software revenue.

This creates a challenge for Xero because, while it is a high-quality business, it is also a premium-priced software company.

Some market participants worry that AI-driven accounting tools could, over time, reduce the need for traditional accounting software. As a result, investors appear to be de-risking and moving money away from tech stocks until there is more clarity.

What the latest update showed

Earlier this week, Xero released an investor briefing outlining its growth strategy.

Management highlighted strong long-term opportunities from artificial intelligence, as well as continued expansion in the United States following its acquisition of Melio.

However, the company also acknowledged that Melio is not expected to reach adjusted EBITDA breakeven on a run-rate basis until the second half of FY28.

What brokers are saying

Despite the sell-off, many analysts remain positive on Xero's long-term outlook.

Macquarie has retained an outperform rating and recently raised its price target to around $234 per share, citing Xero's strong competitive position and long-term growth potential.

Jefferies is more cautious, cutting its price target to about $101 due to margin pressure and the slower path to profitability from the Melio acquisition. Even so, that target still sits above the current share price.

Overall, brokers largely agree that the sell-off reflects tech-sector fear rather than a collapse in Xero's fundamentals, with long-term growth drivers still intact.

Foolish Takeaway

Xero's fall highlights how quickly sentiment can turn against premium-priced technology stocks.

While AI fears are driving much of the selling, investors want clearer proof that Xero can turn growth into profits. Until then, volatility is likely to remain elevated.

Motley Fool contributor Aaron Teboneras has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Jefferies Financial Group, Macquarie Group, and Xero. The Motley Fool Australia has positions in and has recommended Macquarie Group and Xero. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Technology Shares

A child dressed in army clothes looks through his binoculars with leaves and branches on his head.
Technology Shares

Is now the time to invest in EOS shares?

After a sharp sell-off, EOS shares have rebounded as investors reassess the business.

Read more »

A woman points with her pen at a computer where a colleague sits as though they are collaborating on a project. She has a smile on her face.
Earnings Results

Bravura shares ease after first-half result, but remain up 30% this week

The market may have already priced in much of the good news but its still been a good week for…

Read more »

Robot humanoid using artificial intelligence on a laptop.
Technology Shares

Does AI spell doom for REA Group and Car Group?

The fear around artificial intelligence looks overblown, Wilsons Advisory says.

Read more »

A man sits in contemplation on his sofa looking at his phone as though he has just heard some serious or interesting news.
Technology Shares

Did you know WiseTech shares are trading at their biggest discount in their history?

Bell Potter thinks the selloff has been unjustified.

Read more »

Man with virtual white circles on his eye and AI written on top, symbolising artificial intelligence.
Technology Shares

Life360 shares drop 50% from their peak: Buy, sell or hold?

Here's what analysts expect from the tech stock this year.

Read more »

A police officer points their detector at a speeding car.
Technology Shares

This speed camera firm's shares are accelerating on a new contract win

Let's take a look.

Read more »

A montage of planes, ships, and trucks.
Technology Shares

How undervalued are Wisetech shares? Two brokers have their say

Time to go bargain hunting?

Read more »

Frustrated stock trader screaming while looking at mobile phone, symbolising a falling share price.
Technology Shares

EOS shares crash 16% on scathing short seller report

Let's see what is going on with this popular stock today.

Read more »