The Xero Ltd (ASX: XRO) share price has been hammered in the last six months, falling by more than 50%, as the chart below shows. A lot of that pain has seemingly been due to market concerns about what could happen with AI in the coming years.
As one of the world's leading cloud accounting software businesses, it offers subscribers an important service.
But it's certainly possible that the business could be exposed to future competition from AI-developed software. Of course, that doesn't automatically mean those potential competitors will definitely win sizeable market share – they still need to market to customers and win subscribers.
In a recent note from UBS, the broker revealed that its small and medium business IT spending survey appeared to show that AI risk "appears to be reducing" for Xero.
Image source: Getty Images
What did the survey show?
UBS said that its survey across 450 respondents across the US, UK, Canada, and Australia showed three key things.
First, accounting and payments software spending growth is expected to accelerate this year.
Second, customer churn (changing software) intentions remain low, with small and medium businesses "increasingly likely to renew their software subscriptions".
Third, there is an increase in small and medium businesses looking to buy AI capabilities from incumbents and pre-existing software providers, while doing less "DIY" work themselves.
Xero itself is looking to implement AI (more) throughout its business, so Xero can be the portal through which subscribers gain exposure to AI. Increasing use of AI by Xero's customers in other areas of operations will help drive AI-uptake with their existing software providers.
UBS judged Xero as screening well in this survey, with Xero customers looking to increase their spending by 7.7% this year, while payments (Melio) customers are looking to lift spending by 13%.
The broker also noted that 86% of Xero's customers are looking to renew their subscription.
Is the Xero share price a buy?
According to UBS' projection, Xero could generate NZ$2.7 billion in revenue and NZ$225 million in net profit in FY26. Further growth is expected in FY27, with revenue growth to US$3.58 billion and a rise in net profit to NZ$267 million.
UBS currently has a price target of $174 on the Xero share price, which suggests a possible rise of 130% over the next year, at the time of writing. With that bullish view, it's no surprise that UBS has a buy rating on Xero shares.
