Xero Ltd (ASX: XRO) shares had a bit of a wild ride last week, with a sell-off following the release of the company's full-year results, followed by a rally a day later, which recovered all of the losses.
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Kneejerk sell-off
Investors seem to have overreacted to the headline profit figure, which fell 27% to NZ$167.4 million, due to costs associated with Xero's acquisition of Melio.
Outside of that line in the company accounts, there was plenty to be happy about, however.
Xero reported revenue growth of 31% to NZ$2.8 billion and an 18% increase in EBITDA to NZ$757.4 million.
Chief Executive Officer Sukhinder Singh Cassidy said it was a strong result.
She added:
Our 3×3 strategy is hitting its stride, demonstrated by accelerating US growth with 110,000 new customers, including new Melio direct payments customers, and pro-forma revenue growth of 50%. We have powerful momentum across our markets, and delivered strong EBITDA growth while absorbing Melio. Globally we are providing a small business financial operating system for the AI era, driving value for customers while deepening our technology foundations, compliance capability and data advantages, and driving stronger unit economics.
Xero also announced a NZ$550 million share buyback.
Analysts like what they see
Morgans said in a note to clients last week that both the results and the company's outlook to FY27 beat expectations.
They added:
Earnings momentum continues to improve relative to consensus expectations. Management were confident enough to announce a buy-back and hint at potential capital management in FY28. However, investors didn't take comfort with commentary around AI disruption risk versus reward. Management has a plan to maximise the opportunity set ahead of a path to AI monetisation. It's early days in AI and the path to AI driven value creation will become clearer, over time.
Morgans said the key question was whether Xero can replicate its success in Australia and New Zealand in offshore markets.
Morgans has a price target of $111 on Xero shares.
Morgan Stanley, however, is more bullish, with a $130 price target.
The broker said for Xero and for all tech companies with exposure to AI, "the debate on long term earnings and terminal values is still active''.
Morgan Stanley said it thought a share derating had been warranted but was too severe, with the market underappreciating the company's competitive position locally.
And finally, among the brokers, Macquarie has a whopping $235.80 price target on Xero.
They said in their note to clients:
Management is walking the walk, making data-driven decisions leading to better capital allocation outcomes. We see the stock as fundamentally mispriced, and expect AI monetisation and US growth to be the key catalysts … to re-rate the stock.
