Shares in Xero Ltd (ASX: XRO) finished last week with a bang.
The ASX tech share rocketed 8% on Friday to close at $79.67, clawing back some ground after a brutal sell-off earlier in the week.
Even with that strong rebound, Xero shares are still down roughly 30% year to date and about 54% over the past 12 months at the time of writing.
That is a shocking underperformance compared to the benchmark S&P/ASX 200 Index (ASX: XJO), which has gained around 4% over the same period.
So what on earth is happening with this once high-flying tech darling?
Image source: Getty Images
The market hit the panic button
Friday's surge looks very much like a classic relief rally. On Thursday, investors absolutely smashed Xero shares after the company released its latest result.
The main issue? Margins. Investors became nervous about profitability as Xero continues pouring money into cracking the US market and integrating its acquisition of Melio.
In other words, the market saw rising costs, heard "lower margins", and immediately headed for the exits.
Classic tech stock behaviour. But once the panic selling cooled down, investors seemed to remember something important: the actual business is still growing very quickly.
And underneath the scary headlines, there were some seriously strong numbers. Revenue surged 31% to NZ$2.75 billion for the year, showing demand for Xero's accounting software platform remains extremely healthy.
Recurring revenue also kept flying higher, with annualised recurring revenue jumping 37%. For a software company, that recurring revenue stream is gold because it gives investors much better visibility over future earnings.
US growth story is still alive
Perhaps the biggest reason investors are warming back to Xero shares is the US growth story. For years, investors have viewed the massive US small-business market as Xero's ultimate prize.
And right now, the company finally appears to be gaining real traction.
Organic growth in the US reportedly accelerated to 30%, suggesting Xero's expansion strategy may finally be starting to pay off.
That is a big deal. If Xero can establish itself as a serious player in the US accounting software market, the long-term growth runway becomes enormous.
Management's FY27 outlook also helped steady nerves. The company is guiding toward another year of roughly 34% revenue growth despite ongoing macroeconomic uncertainty.
That hardly sounds like a business hitting the brakes.
Artificial intelligence is also becoming a larger part of the investment story. Management highlighted growing adoption of AI-powered tools like its "Just Ask Xero" assistant, alongside partnerships with OpenAI and Anthropic.
The goal is simple: improve automation, increase productivity, and make the platform even stickier for customers.
So, what next?
Another likely driver behind Friday's rebound was Xero's newly announced NZ$550 million share buyback. Buybacks often signal management believes the market has become overly pessimistic about a company's valuation.
And after a 54% share price wipeout, investors may finally be starting to wonder whether the sell-off simply went too far.
Broker sentiment certainly remains bullish.
According to TradingView data, 14 out of 15 brokers currently rate Xero shares as either a buy or strong buy.
The average price target sits at $130.53, implying roughly 64% upside from current levels.
Meanwhile, analysts at Macquarie Group Ltd (ASX: MQG) remain especially optimistic, retaining their buy rating and lifting their price target to $235.80 (from $223.60).
That implies potential upside of almost 200% if things go right from here.
