The Xero Ltd (ASX: XRO) share price has fallen by 57% over the past year, as the below chart shows.
The ASX tech share is a global accounting software company with a presence in a number of countries, including New Zealand, Australia, the UK, the US, Canada, South Africa and Singapore.
Xero is not the only ASX tech share to have fallen in the past 12 months amid worries about increasing competition in this AI era. Pro Medicus Ltd (ASX: PME) and Life360 Inc. (ASX: 360) are two examples of stocks that have fallen by painful double digits in the last year (down 27% and 58%, respectively).
Additionally, Xero recently acquired Melio, a US-based tech business that assists smaller businesses with accounts payable and receivable. The deal makes strategic sense, but acquisition and other Melio-related costs hurt Xero's profit in FY26.
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Is it still a quality ASX share?
The best way a company can regain investor confidence is by delivering growth. If it does, it could convince investors that the Xero share price is trading too cheaply.
The last set of numbers that investors saw was the FY26 result, being the 12 months to 31 March 2026, which was released in May. Xero expects to release the FY27 half-year result to 30 September 2026 on 12 November 2026.
Xero reported in FY26 that operating revenue increased 31% to NZ$2.75 billion and annualised monthly recurring revenue (AMRR) rose 37% to NZ$3.27 billion. I think those are impressive growth numbers for a business that's supposedly in trouble.
Some of that financial progress was driven by another year of subscriber growth – its customer base increased by 11% to 4.92 million during FY26. Rising subscription prices also helped drive its revenue metrics, with the average revenue per customer growing 23% to NZ$55.44.
Profit at the EBITDA level grew slower than revenue, and its net profit went backwards. Adjusted EBITDA rose 18% to NZ$757.3 million, and net profit after tax (NPAT) fell 27% to NZ$167.4 million. Free cash flow increased 9% to NZ$554 million.
Xero reported NZ$50.6 million of acquisition-related costs, while there was also an increase in operating costs. Melio isn't expected to be breakeven on an adjusted EBITDA run-rate basis until the second half of FY28.
Xero's subscriber churn has increased a little over the last few years, but its retention rate still sits at almost 99%, which is incredibly high and shows that customers still get a lot of value out of the software. A low customer churn rate is a key sign of success for software focused on business customers.
Prior to the Melio acquisition, Xero was regularly reporting an increase in its EBITDA, net profit and free cash flow margins. I'd encourage investors to monitor whether that trend of rising margins returns or not in FY27. I think margin improvements will return because of the operating leverage of Xero's business model with its high gross profit margin (Xero's was 83.9% in FY26, including Melio).
I believe the Melio acquisition makes sense to help Xero crack the US market, which is a huge opportunity for the ASX share. If Xero can encourage Melio subscribers to sign up for a Xero subscription, there's a significant revenue synergy opportunity there.
Is the Xero share price a buy?
The world is becoming increasingly digital, so there's significant potential for Xero to help small business customers globally by offering time-saving tools and efficiencies, as well as providing business owners and accountants with compelling reporting and tax office connectivity.
AI could be a headwind for Xero if business owners use it instead of subscribing to Xero. However, it's also possible that Xero's AI offering could be the one that subscribers are attracted to. Plus, Xero offers a lot of integration to banks, the tax office and so on.
Using the earnings projection on CMC Invest, it's valued at well under 40x FY28's estimated earnings. To me, that seems cheap for a business that's estimated to grow earnings per share (EPS) by 92% in FY28 and I'd expect more profit growth in the subsequent years.
According to CMC Invest, the average price target on Xero from four recent broker calls was A$90.20, implying a possible rise of 40% in the next year. Brokers also think it's undervalued, so it looks like a compelling longer-term buy right now.
