What on earth is going on with Xero shares?

The Xero Ltd (ASX: XRO) share price has been on a rollercoaster this year, and at around $111 today, investors are understandably scratching their heads. Only a few months ago, Xero was trading near its highs. Since then, the stock has fallen roughly 40%, raising plenty of questions about what has been driving the volatility.

So, what on earth is going on?

Why Xero has been under pressure

A big part of the recent drop comes down to softer indicators across the business. Growth in key markets has slowed, operating costs have been higher than expected, and competition in cloud accounting continues to intensify. These factors were already weighing on sentiment, but several brokers also trimmed their share price targets after the latest updates, adding even more pressure.

Investors were also unsettled by concerns that Xero's margins might take longer to improve. The company has been investing heavily in product development and AI tools, which is beneficial for long-term innovation but may hinder short-term profitability. Combined with softer conditions for small businesses in some regions, the mood around Xero shifted quickly.

Has the market gone too far?

While the recent fall has been steep, it is worth noting that Xero's underlying business hasn't suddenly fallen apart. Subscriber numbers remain strong overall, revenue continues to grow, and the long-term shift toward cloud-based accounting software remains intact.

In fact, several analysts have argued that the sell-off has been overdone. Broker targets generally still sit between $145 and $170, and Macquarie recently suggested there could be nearly 90% upside from current levels if Xero executes well.

The company has also been tightening its cost base, and that is often the first step that helps margins move in the right direction. For a business with Xero's global footprint and recurring revenue model, even small improvements can shift investor sentiment quickly.

What could turn the share price around

There are a few things I will be watching over the next 6 to 12 months:

• Steadier subscriber growth, particularly in the UK and North America
• Clearer signs of margin improvement
• Continued uptake of Xero's AI-driven features
• Stronger conditions for small businesses, especially in Australia and NZ

If Xero starts making progress in these areas, it may not take much for confidence to return and the share price to head higher.

Foolish takeaway

The recent fall in Xero shares has certainly raised eyebrows. But when you step back and look at the fundamentals, the long-term story remains largely unchanged. Xero is still a global leader in cloud accounting with a long growth runway ahead of it.

Whether this pullback becomes a buying opportunity depends on what management delivers next. Still, at today's levels, the Xero share price is starting to look very attractive for long-term investors.

The post What on earth is going on with Xero shares? appeared first on The Motley Fool Australia.

Motley Fool contributor Aaron Teboneras has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Xero. The Motley Fool Australia has positions in and has recommended Xero. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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