Xero shares (ASX: XRO) have jumped 7.5% to A$87.02 today, capping a tidy 16.2% weekly rally, that will be welcome relief for holders who have seen the stock fall 53% over the past 12 months.
The rebound marks a sharp reversal in sentiment following the company’s May release, when headline net profit fell short of consensus despite robust top-line growth and margin expansion. After working through the detail of the 31 March 2026 year-end figures, brokers are now highlighting Xero’s rare combination of 30%-plus revenue growth alongside improving profitability, a profile that places it among the higher-quality software-as-a-service names on the ASX.
Whilst the fundamentals are playing their role, there is also a broader sentiment shift towards SAAS names, with the IGV ETF (iShares Expanded Tech-Software Sector ETF) up 14.56% on the week, and 24.3% higher over the past month. This has outperformed the XLK ETF (+6.73% on the week, 20% on month), which covers wider tech, highlighting the move back into software names.
US listed software stocks including ServiceNow (NOW), and Datadog (DDOG), are trading 47%, and 89% higher over the past month, with markets now more willing to reward those who are executing well. By the same token, those that have not delivered expected results are being punished, with Intuit shares down 13% on the month, and Adobe a relative underperformer (+7.9%). We have sentiment shifting, but into those that are seen as high quality.
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The Backdrop
Markets initially punished Xero’s stock when management reported net profit after tax below elevated buy-side expectations, even as adjusted EBITDA climbed roughly 24% year-on-year to between NZD750 million and NZD790 million. One-off items including research and development capitalisation, foreign exchange movements, and acquisition-related accounting tied to the Melio transaction clouded the headline number. However, as the post-result dust settled, attention turned to the operational metrics that underpin the bull case: revenue up 31% to approximately NZD2.4 billion, adjusted EBITDA margin in the mid- to high-20s percentage range, and free cash flow per share rising to around NZD5.25 from NZD5.16 in the prior year.
The company’s so-called Rule of 40,(a SaaS industry benchmark that adds revenue growth percentage to free cash flow margin) came in at 48.5% for FY26, well above the 40% threshold that signals a business with durable unit economics. Management emphasised that growth remains broad-based, with particular strength in the United States via the Melio bill-pay and payments platform, as well as continued momentum across Australia and core Asia-Pacific cloud accounting subscriptions.
For the current financial year ending 31 March 2027, Xero guided to operating revenue of NZD3.6 billion to NZD3.7 billion and EBIT or EBITDA in the NZD860 million to NZD920 million range, implying further expansion in both scale and profitability. The guidance reaffirms the company’s FY25–FY27 strategic framework, which aims to balance solid revenue growth with margin discipline, a shift from earlier years when Xero prioritised land-grab expansion over near-term profit.
The Melio acquisition, completed in late 2025, is emerging as a focal point for both bulls and bears. First-half FY26 presentations showed the US payments business driving subscriber additions and higher average revenue per user, with management flagging early cross-sell opportunities that remain largely untapped. The deal moved Xero’s balance sheet from a net cash position to modest net debt, but with more than NZD700 million of adjusted EBITDA now being generated annually, the leverage ratio remains conservative by SaaS standards and leaves room for further investment or capital returns.
Bulls argue the long runway in core markets, combined with nascent US payments growth via Melio, supports a multi-year compounding story for Xero shares, even at current valuation levels. Bears counter that any execution stumble; whether from competitive pressure, product issues, or slower subscriber growth, could trigger another sharp pullback given the stock’s premium multiple. For now, markets appear willing to give Xero the benefit of the doubt, but the bar remains high.
Bull Case:
- Revenue growth above 30% with rising EBITDA margins proves scalable unit economics
- Melio acquisition driving US expansion and payments monetisation with early cross-sell upside
- Rule of 40 metric at 48.5% ranks among highest-quality SaaS names globally
- Free cash flow per share up materially, balance sheet still robust post-acquisition
- FY27 guidance implies continued top-line and profit growth with operating leverage
Bear Case:
- Valuation multiples on PE and EV/EBITDA remain elevated versus ASX tech peers
- Accounting adjustments and one-offs cloud true quality of underlying economic earnings
- Practitioner complaints over service reliability and price rises risk future churn or downgrades
- Intensifying competition from Intuit and vertical challengers threatens market share and ARPU
- Any miss versus high expectations triggers sharp drawdowns as recent volatility demonstrates
