Xero Keeps Executing While the Market Prices In the AI Threat

Price rises, US share gains and an Anthropic partnership point to a business in good health, but fund managers are split on whether AI agents and the Melio deal change the long-term picture.

· 5 min read

A disconnect between fundamentals and price

The argument over Xero has become a test of whether fundamentals still matter in software. In September, the accounting software group fell 31 per cent to a seven-year low, according to Sage Capital, as the market extended its concerns about AI disruption of small business software and higher bond yields weighed on long-duration growth stocks. Pendal Group, which is overweight, noted the selling was exacerbated by the launch of OpenAI's GPT-6 Astra model and Meta's personal AI assistant Muse. Its verdict was blunt: “Fundamentally, there is little sign of pressure on Xero.”

Fundamentally, there is little sign of pressure on Xero.

— Pendal Group, Monthly Report, September 2026

Paradice Investment Management, which earlier made Xero its largest active position, said it continues to believe in the US growth strategy and views the weakness as an opportunity rather than a change in thesis. Blackwattle Investment Partners noted there was no company-specific announcement behind the decline.

Pricing power as proof

Managers point to pricing as the clearest evidence that customers are not drifting away. In August, Xero announced price rises of 7 to 8 per cent in the US and 6 to 8 per cent in New Zealand, effective 1 October, and began phasing out multi-organisation discounts, which Pendal said reinforces the company's pricing power. That followed UK price rises averaging 9 per cent from September, announced in June. Vertium Asset Management captured the logic in July: accounting software is very hard to displace and cheap relative to the risk of getting it wrong, so with such a low price point Xero keeps raising prices while customers remain unlikely to switch.

Atlas Funds Management, before changing its view, made a similar point, noting that while the cost of Xero's software is small, the risks of AI-generated software making a mistake in invoicing, payroll, compliance and tax are high.

Winning share in the US

The US is where managers see the most important progress. Pendal reported in August that competitor Intuit acknowledged a focus on the mid-market had slowed subscriber growth in its core small business franchise, and cited increased competition from two players, including Xero. Pendal said Xero's accelerating US subscriber growth supports the view that it is executing well on its US strategy, and after Intuit's September investor day reiterated that Xero continues to gain share. First Sentier Investors credited a new Silicon Valley-based management team and the Melio acquisition with giving Xero a right to win share from the US incumbent.

Hyperion Asset Management's review of the FY26 result in May noted constant currency revenue growth of 19 per cent, or 31 per cent including Melio, with the underlying US business up 30 per cent excluding Melio. Hyperion said Melio adds bill payment functionality within the Xero platform and gives the business more scale to invest in US brand awareness, and highlighted a new mid-market product called Ultra and continued AI releases including automated bank reconciliation and a partnership with Anthropic. Pendal noted the result also introduced Xero's first buyback, of $550 million.

AI: threat, tool or both?

The bulls argue AI deepens Xero's moat. TMS Capital said in April that the Anthropic partnership would let Xero customers use Claude within its ecosystem for planning, budgeting and forecasting, potentially increasing the value of the subscription and supporting price rises. Pendal highlighted the launch of Xero Workpapers Plus in Australia at A$45 per user per month, estimating an Australian annual recurring revenue opportunity of roughly A$5 million to A$30 million and describing it as strategically important in embedding Xero further into accountant workflows. Paradice's Richardson summarised the bull view in August, saying AI is a wonderful technology, “But it may not disrupt these businesses at the speed that some of the market is starting to price.”

But it may not disrupt these businesses at the speed that some of the market is starting to price.

— Paradice Investment Management, Article, August 2026

Ten Cap is less sure. Rating the stock a hold in June, Ten Cap argued that in future users may interact with an AI agent rather than Xero's own interface. “Instead of the user interface, which they pride themself on, we are now talking to the agent who's then going to use Xero to do whatever the task they need to do,” the manager said, questioning whether that erodes the moat and pressures margins and pricing even as Xero signs agreements with OpenAI and Anthropic.

Melio and the insider signal

The Melio acquisition remains the main self-inflicted wound. Market Partners, a buyer in June, said Xero paid too much, around 13 times revenue, and bought at the wrong time, but still believes integrating payments makes strategic sense and opens cross-sell opportunities. Vertium said Melio is still growing nicely and not losing share, though breakeven by 2028 remains to be proven. Blackwattle said the market has focused on margin pressure from integrating Melio and on execution risk in the US.

Atlas offered the starkest bear signal. Having initially identified Xero as a recovery pick, Atlas switched to a sell in July after it emerged that the chief executive had sold all of her shares at five-year lows. “Hard to bet against the CEO and knowledgeable insiders when they're selling,” Atlas said.

What managers are watching next

Blackwattle has identified the next catalyst: the half-year result will be an important test of subscriber growth, Melio's contribution and margin progress. Managers will also watch whether the October price rises stick without lifting churn, whether US share gains continue against Intuit, and whether AI products such as Workpapers Plus begin to show up in revenue. On valuation, Pendal noted in August that Xero screens cheap relative to history and its growth outlook at 14.6 times NTM EBITDA, and in July described a reverse DCF that implies no future growth is being priced in.