Xero Ltd (ASX: XRO) shares enjoyed a modest bounce on Tuesday, rising 2% to $66.58 during afternoon trading.
The gain offers some relief for shareholders after a torrid year. Xero shares remain down 42% year to date and around 63% over the past 12 months.
So, has the sell-off gone too far? Or is there more pain ahead?
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Why Xero shares crashed
Xero hasn't suddenly become a bad business. Instead, the share price has been caught up in the sharp sell-off across the technology sector.
Investors have grown increasingly concerned that advances in artificial intelligence could disrupt traditional software companies, particularly those relying on subscription-based business models. That fear hit software stocks hard.
At the same time, many ASX technology companies had enjoyed huge gains during 2025, leaving valuations looking stretched. Once sentiment turned, investors rushed for the exits. The result was a brutal reset for Xero shares.
Why brokers remain optimistic
Despite the share price collapse, the investment case of Xero shares hasn't disappeared.
Xero continues to benefit from a highly recurring subscription revenue model, with loyal customers and strong retention rates providing a dependable earnings base.
The company also still has significant room to grow. Its expansion across the UK and US remains in the early stages, while management continues investing in new products such as payroll, payments, and workflow automation to deepen customer relationships.
If Xero can keep adding subscribers while selling more services to existing customers, earnings have plenty of scope to grow over time.
What do the experts think?
Broker sentiment remains surprisingly upbeat.
According to TradingView data, the majority of analysts covering Xero shares have either a buy or strong buy recommendation.
The average 12-month price target sits at $127.76, implying around 93% upside from current levels. Some brokers are even more bullish, with the highest target price standing at $239.26. That points to a potential gain of 260% over the next 12 months.
Last month, Morgans upgraded Xero from hold to add and lifted its target price to $215. The broker pointed to improving sales momentum, disciplined cost management, and confidence that the company can continue expanding profit margins.
Foolish takeaway
Xero shares have endured a painful year, but brokers clearly believe the market has become too pessimistic.
The company still enjoys a sticky customer base, recurring revenue, and sizeable international growth opportunities.
That doesn't guarantee a recovery. If AI disrupts the software industry more quickly than expected or global growth slows, the shares could remain volatile.
However, for long-term investors willing to look beyond today's weak sentiment, many analysts believe Xero's recent share price slump could prove to be an opportunity rather than a warning sign.
