Here is a question worth sitting on.
What would you call a software company that just delivered 31% revenue growth, added 110,000 new customers in the United States in a single year, partnered with Anthropic to embed AI into its platform, and authorised a $550 million share buyback?
Most investors would call it a buy. The market has called Xero Ltd (ASX: XRO) a sell.
Xero shares are down approximately 60% from their peak of $196.52 and are trading near $79.27 today. As a result, Xero has been one of the most punished large-cap technology stocks on the ASX.
Yet the business underneath has rarely looked more exciting. The market could be misunderstanding the opportunity set for Xero
Image source: Getty Images
Why Xero shares fell and why the market may be wrong
The sell-off has two primary causes.
First, the broader rotation out of high-multiple software stocks that has defined ASX technology investing in 2025 and 2026 hit Xero hard.
These investors have been particularly worried about the risk AI poses to Xero's business model.
Second, Xero's FY 2026 full-year result on 14 May showed a 27% decline in statutory net profit, which spooked short-term investors.
What those investors may have missed is that the profit decline was driven entirely by $45 million in one-off Melio acquisition costs.
Strip those costs out, and Xero delivered operating revenue growth of 31% to $2.8 billion, adjusted EBITDA growth of 18% to $757 million, and free cash flow of $554 million.
Those are, on the surface, quite exceptional numbers.
The US breakthrough that shows the way forward
For years, the US was Xero's great unproven market. FY 2026 may have changed that in dramatic fashion.
US revenue surged 240% as Melio's bill pay functionality was integrated into the Xero platform. This gives American small businesses a payments and accounting combination that Intuit's QuickBooks does not natively offer at the same level.
Perhaps as a result, Xero added 110,000 US customers in FY 2026, its strongest-ever subscriber addition in that market.
The opportunity set is huge. The US is the world's largest small business accounting software market, and Intuit controls approximately 80% of it.
Xero does not need to win the whole market to create extraordinary value for shareholders. The company just needs to keep taking share at its current pace.
CEO Sukhinder Singh Cassidy said:
Our strong full year results demonstrate Xero's disciplined execution and macro-resilience. Our […] strategy is hitting its stride, demonstrated by accelerating US growth.
Two million subscribers are already using Xero's AI
This is the part of the Xero story that many investors are misunderstanding.
Over two million Xero subscribers are now actively using AI features, with 300,000 specifically using new generative AI tools.
What's more, Xero has partnered with Anthropic to integrate Claude AI directly into its platform. The company has launched XeroForce, a natural language AI agent that allows business owners to query their finances conversationally.
Smart document capture and automated reconciliation are live and driving measurable improvements in customer engagement.
These product updates make Xero's platform more valuable and stickier for its existing user base.
Why AI is an opportunity, not a threat
The most persistent bear argument against Xero shares is that AI will make accounting software obsolete.
These fears may have been misplaced.
Rather than replacing platforms like Xero, AI agents depend on them. Every automated workflow needs a clean, structured, real-time data layer to function reliably, and businesses will pay a premium for software that provides it.
Xero has positioned itself to capture that value through higher-tier subscriptions, expanded product attach rates, and deeper customer lock-in.
With over two million subscribers already using Xero's AI features, the more AI is embedded into the platform, the harder it becomes for customers to leave.
What Goldman Sachs and Morgans are saying about Xero shares
The broker community has been far more constructive on Xero shares than the market.
Goldman Sachs retained its buy rating and lifted its price target to $205. The broker described the US performance as an important data point that gives confidence to Xero's American strategy.
At today's Xero share price, that $205 target implies upside of approximately 160%.
Another broker, Morgans, upgraded Xero from hold to add with a $215 price target, noting improved sales traction and cost discipline as key positives.
Foolish Takeaway
Xero shares are down 60% from their peak.
The business just delivered 31% revenue growth, a US breakthrough, two million AI users, and a $550 million buyback.
What's more, Goldman Sachs sees 160% upside.
For investors who can look past twelve months of share price pain, Xero could be the best tech stock on the ASX right now.
