The Xero Ltd (ASX: XRO) share price has had a terrible time over the past year, dropping by more than 60%, as the chart below shows.
The cloud accounting software provider has lost investor confidence, and its profitability isn't growing as it used to.
Xero's latest result was mixed.
Image source: Getty Images
Earnings recap
In the 2026 financial year result, meaning the 12 months to 31 March 2026, customers grew 11% to 4.9 million, operating revenue grew 31% to $2.75 billion, operating profit (EBITDA) grew 24% to $790 million, net profit after tax (NPAT) declined 27% to $167 million, and free cash flow rose just 9% to $554 million.
Xero said that Melio-related acquisition costs affected its profitability. While the market may not be totally convinced about Melio, it could be crucial to growth in the US.
Its international markets are growing strongly – that's countries beyond Australia and New Zealand – international revenue grew 47% to $1.4 billion or 25% on an organic basis excluding Melio. US revenue grew 240%, or 30% on an organic basis excluding Melio. UK revenue grew 26%, with customer growth of 14%.
ANZ continues to see solid growth, with revenue rising 18% to $1.4 billion.
Xero is leaning on price rises to be a significant driver of its financials, which is helping drive a number of revenue metrics. Average revenue per customer grew by 23% to $55.44, annualised monthly recurring revenue (AMRR) soared 37% to $3.27 billion and the total lifetime value (LTV) of customers increased 17% to $21 billion.
The ASX tech share said that it expects operating revenue to be at least $3.6 billion and adjusted EBITDA to be at least $860 million, implying year-over-year growth of at least 30% and 13.6%, respectively.
Is the Xero share price a strong buy?
There are certainly plenty of concerns about what AI could mean for software players like Xero, but its financials continue to show progress, which will likely re-energise the market in the future, in my view.
According to CMC Invest, the business has received three analyst ratings in the past three months.
Of those three analysts, the average price target is $108.53, suggesting a rise of 89% over the next year. Even the most pessimistic of the three analysts has a price target of $85, suggesting a possible rise of 48% over the next year.
Clearly, analysts think the business is undervalued, and the multiple looks reasonable based on free cash flow. If its financials can excite the market again, it could be materially undervalued.
