{"id":140328,"date":"2025-11-18T00:46:10","date_gmt":"2025-11-18T00:46:10","guid":{"rendered":"https:\/\/www.newsbeep.com\/nz\/140328\/"},"modified":"2025-11-18T00:46:10","modified_gmt":"2025-11-18T00:46:10","slug":"why-xero-shares-are-tumbling-despite-its-record-profit-and-bullish-outlook","status":"publish","type":"post","link":"https:\/\/www.newsbeep.com\/nz\/140328\/","title":{"rendered":"Why Xero shares are tumbling despite its record profit and bullish outlook"},"content":{"rendered":"

Xero reiterated it sees new acquisition Melio doubling revenue by FY2028 as it acts as a vehicle for growth in the key North American market.<\/p>\n

But the company\u2019s shares tumbled 9% immediately after the result.<\/p>\n

The stock was at A$140 ($161) going into the half-year numbers on November 13, but at one point yesterday was down another 6% to below A$120.<\/p>\n

Some are pinning the fall on investor scepticism about Xero\u2019s A$2.5b ($4.1b) acquisition of Israeli-American payments firm Melio in a deal announced in June (the same month Xero\u2019s stock hit an all-time high of A$196.52) and completed in October.<\/p>\n

A distraction from \u2018more winnable opportunities\u2019<\/p>\n

In a September 12 research note, Morningstar analyst Roy Van Keulen said the mega-acquisition was \u201cunlikely to improve Xero\u2019s prospects in the US\u201d \u2013 a market that the Wellington-founded firm has been trying to crack for years.<\/p>\n

In fact, Van Keulen saw the purchase (via a mix of cash, scrip and equity placement<\/a>) as sucking resources from better growth opportunities.<\/p>\n

Did he see anything to change his mind in Xero\u2019s half-year result delivered on November 12 or the following conference call with analysts, hosted by chief executive Sukhinder Singh Cassidy and chief financial officer Claire Bramley?<\/p>\n

\u201cThe short answer is \u2018No\u2019,\u201d Van Kelen told the Herald. Xero is up against a well-entrenched competitor in the US that benefits from strong network effects, Intuit.<\/p>\n

\u201cThis acquisition helps it get closer to product parity, but we think the company would have been better off trying to earn referral fees from companies like Melio or Bill.com.<\/p>\n

He added: \u201cBy doubling down on the US, this is also distracting the company from seizing on more winnable opportunities, like the UK.\u201d<\/p>\n

When will Melio turn a profit? Xero won\u2019t say<\/p>\n

On a post-earnings conference call, Xero drew praise from analysts for rapid progress in integrating Melio with its own product. Melio billing is on track to be offered for Xero customers in the US next month.<\/p>\n

And Singh Cassidy reiterated the Melio acquisition would \u201cmore than double\u201d her firm\u2019s FY2025 group revenue ($2.1b) by FY2028.<\/p>\n

But she also qualified that it was an \u201caspirational target\u201d rather than official guidance.<\/p>\n

And when asked by Jefferies analyst Roger Samuels, who said it looked like Melio had lost $56m in the half-year, compared to about $60m in the previously comparable period, when Melio would contribute to Xero\u2019s bottom line, Bramley replied: \u201cWe\u2019re not going to give an exact date of when Melio becomes profitable. We\u2019re just months into owning them.\u201d<\/p>\n

Singh-Cassidy said Melio grew revenue 68% to $183m in the first half, in line with Xero\u2019s expectations. The start-up finished the period with 87,000 customers.<\/p>\n

\u2018Exhausted\u2019 pricing power<\/p>\n

Van Kelen had a fresh reason for pessimism post-earnings.<\/p>\n

In the first half, Xero increased its arpu (average revenue per user per month) by 19% \u2013 or 8% in constant currency terms \u2013 to $54.08.<\/p>\n

But with churn rates and the cost of customer acquisition increasing, Van Kelen says that, in his view: \u201cWe\u2019ve seen the exhaustion of Xero\u2019s pricing power.\u201d<\/p>\n

There was still growth, but it was slowing in key markets as \u2013 in his view \u2013 price increases sparked customer defections.<\/p>\n

Van Kelen saw it as notable that even during its period of hikes earlier this year, which caused squeals on social media, Xero did not raise prices on its cheapest plans.<\/p>\n

Slowing growth<\/p>\n

Total subscribers increased 10% year-on-year in the first half to 4.59m. Growth was flat with H125 (when 10% \u201cunderlying\u201d subscriber growth was reported) and represented a tail off from H124 (13% subscriber growth), H123 (16%) and H122 (23%).<\/p>\n

Plans to monetise AI?<\/p>\n

At its September XeroCon event in Brisbane, Singh-Cassidy talked-up an AI \u201csuperagent\u201d called Just Ask Xero (JAX)<\/a> and its ability to automate routine tasks, including bank reconciliations, data entry, and getting paid. <\/p>\n

Evans and Partners\u2019 Paul Mason asked if Xero had settled on a plan to monetise AI through add-ons, including it in new pricing tiers. or the \u201cembedding it in the core price\u201d.<\/p>\n

\u201cWe are not monetising AI this year, explicitly,\u201d Singh-Cassidy replied.<\/p>\n

\u201cThe pricing models are still early. We\u2019re seeing others take a combination of approaches. Some are doing consumption-based, some are doing tiers. I don\u2019t think we\u2019ve landed on what model we\u2019ll use yet.\u201d<\/p>\n

She added it was still \u201cvery, very early days\u201d for staff using AI tools internally, but productivity was being increased with Gemini and other tools.<\/p>\n

\u201cWe now have over 70% of engineers using AI in their daily workflows, and nearly 50% of customer support responses are drafted by AI,\u201d she said.<\/p>\n

Van Kelen thinks Xero\u2019s shares have further to fall.<\/p>\n

He has a \u201cfair value\u201d estimate of A$100.<\/p>\n

Chris Keall is an Auckland-based member of the Herald\u2019s business team. He joined the Herald in 2018 and is the technology editor and a senior business writer.<\/p>\n","protected":false},"excerpt":{"rendered":"Xero reiterated it sees new acquisition Melio doubling revenue by FY2028 as it acts as a vehicle for…\n","protected":false},"author":2,"featured_media":140329,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5],"tags":[95,192,8775,138,127,305,95299,321,302,111,139,69,17695,5340,1974,180,95298,4276,86495],"class_list":["post-140328","post","type-post","status-publish","format-standard","has-post-thumbnail","category-business","tag-and","tag-are","tag-bullish","tag-business","tag-despite","tag-have","tag-heebeejeebees","tag-investors","tag-its","tag-new-zealand","tag-newzealand","tag-nz","tag-outlook","tag-profit","tag-record","tag-shares","tag-tumbling","tag-why","tag-xero"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts\/140328","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/comments?post=140328"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts\/140328\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/media\/140329"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/media?parent=140328"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/categories?post=140328"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/tags?post=140328"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}