It has been a miserable year for investors in Xero Ltd (ASX: XRO) shares.
The ASX technology stock finished Wednesday down another 3% at $70.20. That leaves the shares down 9% over the past month, 38% in 2026, and a painful 61% over the past year.
So why has sentiment turned so negative?
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Higher rates, lower valuations
The biggest headwind for Xero shares has been rising interest rates. Growth companies like Xero are valued largely on the profits investors expect them to generate many years into the future. When interest rates rise, those future earnings become less valuable in today's dollars.
The result? Investors tend to pay lower valuation multiples for fast-growing technology businesses, even if the underlying company continues to perform well.
Artificial intelligence has added another layer of uncertainty. Some investors worry that increasingly capable AI tools could automate parts of the accounting and bookkeeping services that software providers like Xero offer.
Whether those fears prove justified remains to be seen, but they've clearly weighed on sentiment across the software sector.
Business keeps delivering
Here's the interesting part. The price of Xero shares has collapsed. The business hasn't.
At its FY26 result, Xero reported annualised monthly recurring revenue (AMRR) of $3.27 billion, up an impressive 37% from the previous year.
Customer numbers climbed 11% to almost 4.92 million. Average revenue per user also increased 23% to $55.44, showing the company is successfully deepening relationships with existing customers while attracting new ones.
Those are hardly the numbers of a company in decline. Xero also continues to benefit from powerful long-term trends as businesses increasingly move accounting, payroll, and financial management to cloud-based platforms.
What do analysts think?
Broker sentiment remains surprisingly upbeat despite the share price collapse. According to TradingView data, 14 of the 15 analysts covering Xero currently rate Xero shares either a buy or strong buy.
The average 12-month price target sits at $131.35. That implies potential upside of approximately 87% from current levels. The most bullish analyst believes Xero could climb even higher, with a target suggesting upside of around 237%.
Even the most cautious analyst still expects gains, with the lowest price target sitting at $77 per share, about 10% above Wednesday's close.
Buy, hold or sell?
The investment debate around Xero shares has become much simpler. The bears argue higher interest rates and AI could permanently reduce the premium investors are willing to pay for software companies. The bulls counter that Xero continues to grow its customer base, recurring revenue, and profitability at an enviable pace.
If interest rates begin easing and the company maintains its operational momentum, the current share price could eventually look overly pessimistic. For investors willing to tolerate volatility, Xero remains one of the ASX's highest-quality software businesses.
The question isn't whether the company is still growing. It's whether the market has become far too negative about its future.
