Xero share price (ASX:XRO) has dropped 1.46% today, bringing XRO into correction territory. Closing at A$173.83, Xero’s stock is down more than 10.5% from its recent high in late June.
A pullback after a bullish run can be healthy, yet questions need to be asked as to whether this is likely to be a short term pullback, or something more sustained. Concerns surrounding its recent acquisition of Melio Payments, market reactions to financing strategies, and broader questions about future growth prospects remain.
The firm’s growth story has been compelling, fuelled by its dominance in providing accounting solutions for small and medium-sized businesses. However, its premium valuation has always left it vulnerable to market adjustments.
The recent price decline has pushed the stock below its short-term moving averages, signaling a bearish trend, though the longer-term uptrend, as indicated by the 200-day moving average, remains tentatively intact.
A key catalyst for the recent correction is Xero’s ambitious acquisition of Melio Payments, a U.S.-based payments provider, for $2.5 billion, announced on June 25, 2025.
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While the strategic rationale to bolster Xero’s presence in the crucial U.S. market where it currently derives only 7% of its sales is understood, the hefty price tag has rattled investors. CEO Sukhinder Singh Cassidy has emphasized the acquisition as pivotal for scaling operations in North America. However, the market’s initial response was lukewarm, with Xero’s share price declining by 4.7% following the announcement.
Analysts have pointed out that the acquisition price represents a significant multiple (13.4x) of Melio’s annual revenue of US$187 million, particularly considering Melio’s cash flow loss of US$154 million in the previous quarter.
To finance the Melio acquisition, Xero undertook a fully underwritten institutional placement, raising A$1.85 billion by issuing approximately 10.5 million shares at $176 per share.
Adding to the pressure, Xero’s financial performance for the fiscal year ending March 31, 2025, while showing a 23% increase in operating revenue to NZ$2.1 billion, fell slightly short of market expectations. Adjusted EBITDA reached NZ$640.6 million, and net profit after tax was NZ$227.8 million. Moreover, the operating expense ratio guidance for FY 2026, set at 71.5%, exceeded analysts’ anticipated 69.3%, raising concerns about cost management.
Furthermore, delays in the UK government’s Making Tax Digital (MTD) initiative, originally slated for April 2024 and now pushed back to April 2026, have dampened Xero’s short-term growth prospects in its largest market outside of Australia. The MTD initiative was expected to drive demand for digital accounting solutions, and its postponement has impacted Xero’s anticipated revenue growth.
Looking ahead, analysts forecast revenue for the next quarter to reach approximately A$1.01 billion. The coming earnings reports and management commentary will be crucial in determining whether this correction is a temporary setback or a sign of more profound challenges.
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